Monday, December 01, 2003

Forecasting happiness

Economists use the term "happiness" (or "utility") to explain why people make the choices they do. A person picks A over B because A makes them happier than B.

Behavioral economics questions some of the logic behind this by pointing out that people are often disappointed after making their choices, and feel let down after their initial expectations were too high ("buyers remorse").

It's hard to know what to do with these findings. One of "Thaler's Rules" (U Chicago behavioral economist Dick Thaler, my former teacher, had a bunch of rules that served as memonics) was that "If you spot a bias, de-bias. If you can't de-bias, re-bias". Applying that to correcting "buyers remorse" leads you to some peculiar places.

If people recalibrate their increased happiness after a raise or winning the lottery back down to normal, then it means that, broadly speaking, having more money does not make you any happier. This is not an argument for higher wealth redistribution though, because any increase in consumption for poor people through transfers does not make them any better off either! Indeed, if individuals cannot be made better off by more, maybe the best thing would be zero redistribution, because then at least society as a whole would have the maximum ability to produce new things that you could use to pay for healthcare. (Everyone prefers being alive and healthy to being sick and dead).


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