journals review on the utility maximization and happiness

8/17/2019 JOURNALS REVIEW ON the Utility Maximization and Happiness.

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Journals Review: Microeconomics (PEA6014)

1.0 Introduction

This journal reviews are consists o our journals! Each journal will "escri#e

on their intro"uction$ motivation on wh% the stu"% has #een con"ucte"$

the research "esi&n an" the conclusion or ever% journal! Journal that has

#een chosen is all a#out the 'tilit% Maimiation an" *a++iness!

2.0 Journal 1: Anomalies Utility Maximization and Experienced

Utility

The journal was written #% ,aniel -ahneman an" Richar" *! Thaler! This

journal was +u#lishe" in .olume /0 in Journal o Economics Pers+ectives

on winter /006! The authors o this are journal are ,aniel -ahneman who

is a Eu&ene *i&&ins Proessor o Ps%cholo&% an" Proessor o Pu#lic Aairs$

oo"row ilson 2chool! 3oth o these res+onsi#ilities are at Princeton

'niversit%$ Princeton$ ew Jerse%! The other author o this journal is

Richar" *! Thaler which is a Ral+h an" ,oroth% -eller ,istin&uishe"

2ervice Proessor o 3ehavioral 2cience an" Economics an" he is also a

,irector o the 5enter or ,ecision Research$ ra"uate 2chool o 3usiness$

an" #oth res+onsi#ilities are at the 'niversit% o 5hica&o$ 5hica&o$ 7llinois!

2.1 Motivation

Research has #een con"ucte" or reason o the assum+tion that utilit% is

alwa%s maimie" allows oten sur+risin& inerences a#out the nature o

the "esires that &ui"e +eo+le8s ever9rational choices! This metho"olo&%

has ha" man% uses an" un"enia#l% has charm or economists$ #ut it rests

on the sha% oun"ation o an im+lausi#le an" unteste" assum+tion! 7n

this stu"%$ researcher ha" "iscusse" a version o the utilit% maimiation

h%+othesis that can #e teste" an" the% oun" that it is alse! The anal%sis

o the stu"% has #e&ins with a "istinction #etween two senses o the term

utilit%! ;ne is$ Decision utility has also #een calle"


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experienced utility reers to the he"onic e+erience associate" with an

outcome!

Accor"in& to researchers$ the ol"er inter+retation o utilit% is on the

>uestion o whether choices maimie utilit% has a sim+le meanin& which

is whether +eo+le choose the o+tions that the% will enjo% the most! As in

mo"ern "ecision theor%$ which is i&norin& the "istinction an" the >uestion

is >uite "ierent orm the ol"er8s$ which is in mo"ern theor% the% are

ocusin& on the +reerences o consistent on each other an" on the

aioms o rational choice! A lon& series o mo"ern challen&es to utilit%

theor%$ startin& with the +ara"oes o Allais (1?@) an" Ells#er& (1?61)

an" inclu"in& ramin& eects$ have "emonstrate" inconsistenc% in

+reerences! This stu"% has reviewe" em+irical challen&es to utilit%

maimiation which is return to the ol" >uestion o whether +reerences

o+timie the e+erience o outcomes!

Much o this stu"% has ocuse" on two thin&s! The% are the

necessar% o con"ition or utilit%9maimiin& choices on the a#ilit% o

economic a&ents to mae accurate or at least un#iase" an" the orecastso the he"onic outcomes o +otential choices! The case that researchers

reviewe" shows that this con"ition is not satisBe" where +eo+le "o not

alwa%s now what the% will lie an" the% are oten mae s%stematic

errors in +re"ictin& their uture e+erience o outcomes an" its "irectl% ail

to maimie their e+erience" utilit%!

7n this stu"%$ researchers mentione" on metho" o measurin& errors

in he"onic orecasts! Researchers assume" that when +eo+le main& a

choice at time t 0$ that is mean the% are maes a orecast o the utilit% o

an outcome that will #e e+erience" at a later time t1! These orecasts o

the utilit% is calle" as he"onic orecasts which it is ma% #e e+licit (can #e

o#serva#le) or im+licit which is the the% must #e inerre" rom the a&ent8s

choices at t 0! 2%stematic errors o he"onic orecastin& can #e

"emonstrate" in several wa%s! There are$ #% com+arin& he"onic orecasts

with "irect measures o e+erience" utilit% which is #% creatin& situations

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in which choices lea" to "emonstra#l% inerior e+eriences or #% showin&

the he"onic orecasts or choices are inCuence" #% actors that are clearl%

irrelevant!

A+art rom that$ the researchers also were not claime" that +eo+le

"o not now on what the% lie #ecause the% "o now well a#out it as

when the t1 is imme"iatel% ollows the t 0 or when the e+erience is

amiliar! This is same as we are rarel% sur+rise" #% the taste o the secon"

s+oonul rom a #owl o sou+! *owever$ +eo+le "o not alwa%s now what

the% will lie in uture$ an" the% are liel% to "o error most severel% when

the tem+oral &a+ is lon&$ when the a&ent8s state an" when the

circumstances are var% #etween t1 an" t 0!

2.2 Researc !esi"n

7n this stu"% the researches ha" "iscusse" our areas in which errors o

he"onic orecastin& an" choice have #een "ocumente"! The% are$ the Brst

is where the emotional or motivational state o the a&ent is ver% "ierent

at t 0 an" at t 1$ the secon" is where the nature o the "ecision ocuses

attention on as+ects o the outcome that will not #e salient when it is

actuall% e+erience"$ the thir" is when choices are ma"e on the #asis o

Cawe" evaluations o +ast e+eriences an" the ourth is when +eo+le

orecast their uture a"justment to new lie circumstances!

2.3.1 Efects o the Current Emotional State

The eam+le o


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This


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have #een investi&ate" as a source o such "iscre+ancies! The% are$

whether the tas re>uires the evaluation o a sin&le &oo" or a com+arison

value o two com+etin& &oo"s an" whether a "ecision involves multi+le

&oo"s that will #e consume" at "ierent times!

3ase" on *see (/000)$ he o#serve" that the contet in which

consumers mae choices is liel% to in"uce similar reversals #ecause

consumers oten mae choices in joint evaluation which is or eam+le

when com+arin& televisions at a store$ #ut su#se>uentl% e+erience onl%

the o+tion the% chose! 2mall "ierences in soun" >ualit% will not #e

noticea#le without a stan"ar" o com+arison! 7n contrast$ com+arison is

not re>uire" to evaluate whether an o#ject is u&l% or #eautiul! 5onsumers

are thereore susce+ti#le to the mistae that *see (/000) "escri#e"$

consumers are +a%in& too much attention to the small #ut noticea#le in

the store a#out the "ierence in soun" >ualit% an" too little attention to

the a++earance! 5om+arative eects can arise even when the tas "oes

not e+licitl% re>uire it!

Thus$ Rea" an" Doewenstein (1??@) were intro"uce" the term o

diversifcation bias to reer on the ecess o variet% seein& in

simultaneous choice! The term im+lies that se>uential choice lea"s to

hi&her e+erience" utilit%! This +re"iction was conBrme" in several stu"ies

in which +artici+ants re+orte" their enjo%ment o "ecisions ma"e either

simultaneousl% or se>uentiall%! The authors +ro+ose" that simultaneous

"ecisions cause the attri#ute o variet% to #e much more salient in

simultaneous choice than it will #e at the time o actual consum+tion!

2.3.3 Learning rom the Past

;n this su#to+ic$ researchers sai" that consumers8 choices oten involve

e+eriences that the% have alrea"% ha"! This is #ecause o the

+reerences an" he"onic orecasts are inorme" #% +ersonal memor% in

these cases an" mi&ht thereore #e e+ecte" to #e etremel% accurate!

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*owever$ he"onic orecasts that are #ase" on store" evaluations o +ast

encounters will #e #iase" i these memories are #iase"$ an" several

sources o such #iases o remem#ere" utilit% have #een esta#lishe"! 7n

a""ition$ #ase" on 2tone$ 3ro"eric$ Porter an" -aell (1??H) sai"$evaluations o the +ast are anchore" on the in"ivi"ual8s emotional state

when the evaluation is ma"e or the orecasts on the uture! 3iase"

evaluations o +ast e+iso"es were "ocumente" in a series o earl%

e+eriments in which +artici+ants re+orte" retros+ective evaluations o

e+eriences that varie" in #oth he"onic value an" "uration!

2.3.4 Mispredicting daptation

Accor"in& to the researchers$ +eo+le must sometimes +re"ict the he"onic

eect o a lon&9term chan&e in lie circumstances! 2ocial +s%cholo&ists

,aniel il#ert an" Timoth% ilson ori&inall% coine" the term “aective

orecasting= to "escri#e this mental activit%! Man% o the chan&es that

+eo+le mae in their lie circumstances are "riven #% the wish to im+rove

their ha++iness or re"uce their unha++iness an" inevita#l% invoe some

i"ea o the he"onic eects o these circumstances! 7n a""ition$ +eo+le also

have stron& intuitions a#out the eects on well9#ein&! As il#ert an"

ilson (/000) note"$ mistaes on aective orecastin& can cause

erroneous choices$ which is calle" as “miswanting.”

The central result o man% e+lorations o aective orecastin& an"

intuitive theories a#out well9#ein& has #een "escri#e" as a


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climate! This is #ecause o the climate is more im+ortant in aective

orecasts than in actual well#ein&! Thus$ the ocusin& illusion hel+s resolve

these two central +ules in the stu"% o well#ein&! The Brst +ulin&

o#servation is that +eo+le oten a"a+t sur+risin&l% well to im+ortantchan&es in their lives! The secon" +ulin& o#servation is that the Brst is

sur+risin&! Althou&h a"a+tation is u#i>uitous$ it is +oorl% re+resente" in

the naive theor% o well9#ein& rom which aective orecasts are "rawn!

2.# $onclusion

The conclusion rom this #o"% o research is that +eo+le are

s%stematicall% wron& in their e+ectations a#out the lie circumstances

that will increase or "ecrease their ha++iness$ which in turn im+lies that

lie choices that +eo+le mae in their +ursuit o ha++iness are also liel% to

#e wron&! The act that +eo+le are sometimes ailin& to maimie utilit%

"oes not im+l% on someone else such as s+ouses$ +arents$ em+lo%ers or

&overnments that shoul" usur+ the ri&ht to choose!

#.0 Journal 2: Experienced Utility as a %tandard o& 'olicy

Evaluation

Title o the secon" journal is E+erience" 'tilit% as a 2tan"ar" o Polic%

Evaluation which has #een written #% ,aniel -ahneman an" Ro#ert

2u&"en! This journal was +u#lishe" in 2+rin&er /00@ un"er Environmental

an" Resources Economics section! The main +ur+ose o the stu"% is

researchers woul" lie to e+lore the +ossi#ilit% o #asin& economic

a++raisal on the measurement o e+erience" utilit% which is utilit% as

he"onic e+erience rather than "ecision utilit% which is utilit% as a

re+resentation o +reerence! 3ecause o un"erestimation o the etent o

he"onic a"a+tation to chan&e" circumstances an" #ecause o the

IIocusin& illusion88 which is ea&&eratin& the im+ortance o the current

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ocus o one8s attention$ in"ivi"uals8 orecasts o e+erience" utilit% are

su#ject to s%stematic error! 2uch errors in"uce +reerence anomalies

which the e+erience" utilit% a++roach mi&ht circumvent! The II"a%

reconstruction metho"88 o measurin& e+erience" utilit% is consi"ere" asa +ossi#le alternative to state" +reerence metho"s!

#.1 Motivation

hile$ the +ur+ose o this stu"% is to e+lore the im+lications o #asin&

economic +olic% evaluation on e+erience" utilit% which is on utilit% as

he"onic e+erience$ the conce+t o utilit% that was use" #% Jerem%

3entham an" #% 1?th9centur% economists! The researchers su&&este"

that this a++roach mi&ht +rovi"e a wa% o avoi"in& some o the +ro#lems

that so9calle" anomalies cause or current metho"s o state" +reerence

anal%sis! Asi"e$ the researchers also sai" that it is too earl% to #e

conB"ent in claimin& that a metho"olo&% o state" ha++iness is a via#le

alternative to that o state" +reerence! *owever$ the researchers tr% to

show that this a++roach has enou&h +romise to #e worth urther

"evelo+ment! As +art o this investi&ation$ the researchers ha" "iscusse"

some recent Bn"in&s concernin& a"a+tation to +leasura#le an" +ainul

e+eriences an" +eo+le8s ailure to antici+ate such a"a+tation!

Thus$ the researchers su&&este" that these +ro+erties o human

+s%cholo&% are amon& the actors causin& anomalies in contin&ent

valuation! *owever$ these +ro+erties also create certain "iGculties or the

measurement o e+erience" utilit%! Thereore$ the researchers were

consi"ere" on how those "iGculties mi&ht #e overcome!

#.2 Researc !esi"n

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This stu"% is inclu"in& o our +arts which are ,ecision 'tilit%$

E+erience" 'tilit% an" 5ontin&ent .aluation$ 5ontin&ent .aluation an"

,ecision 'tilit%$ ,eviations #etween ,ecision 'tilit% an" E+erience"

'tilit% an" *ow 5an e Measure E+erience" 'tilit%!

3.2.1!ecision "tilit#$ Experienced "tilit# and Contingent %aluation

7n this su#to+ic$ researchers mentione" that there are two "ierent

inter+retations o the term Iutilit%8 which have #een use" in the literature

o economics! 7n its ori&inal inter+retation$ which was "erive" rom

3entham$ utilit% is inter+rete" in he"onistic terms$ as a measure o

+leasure an" +ain! hile in the 1?th centur%$ E"&eworth (1?6H) su&&este"

the i"ea o what he calle" as the Ihe"onimeter8 which is an ima&inar%

instrument o analo&ous with the #arometers use" in weather recor"in&

stations! This instrument coul" measure the level o +leasure or +ain that

an in"ivi"ual was e+eriencin& at an% moment an" then +lot it as a

continuous unction o time! The inte&ral un"er the curve +lotte" #% the

he"onimeter woul" #e a measure o the in"ivi"ual8s ha++iness or a &iven

+erio"! Thus$ there is a "evelo+in& stran" in the recent research literature

o economics is tr% to revive this inter+retation o utilit% as e+erience"

utilit%!

Asi"e$ the researchers also mentione" that "ecision utilit% is a

re+resentation o +reerences$ an" the conce+t o +reerence is

un"erstoo" in terms o choice which is a +erson8s +reerences are the

mental entities that e+lain his choices an" are reveale" in those choices!

7 utilit% is inter+rete" as "ecision utilit% an" i economic a&ents are

assume" to #e rational utilit% maimisers$ there is no nee" to worr% a#out

whether +eo+le are choosin& thin&s that the% will enjo% consumin&!

Merel% #% #ein& rational in the ormal sense o actin& on consistent

+reerences$ the% are maimisin& "ecision utilit%! A+art rom that$ in this

stu"%$ the researchers e+lore" the o+tion o usin& the maimisation o

e+erience" utilit% as the normative criterion or economic anal%sis!

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3.2.2Contingent %aluation and !ecision "tilit#

7n this su#to+ic$ researchers start their writin& with a >uestion o uestions +rovi"e inormation a#out

"ecision utilit%=! Then researchers sai" that one o the major +ro#lem

towar"s this res+onse is it ma% reveal attitu"es rather than +reerences!

This is #ecause the lo&ic o attitu"es an" the lo&ic o +reerences are >uite

"ierent! Preerences are etensional that are com+arisons on alternative

states o the worl"! 7n contrast$ attitu"es are non9etensional that

+rom+te" #% reerences as its re+ort to the events in min"!

;ther than that$ researchers also mentione" on the im+ortant as+ect o

the attitu"e is the imme"iate emotional res+onse o liin& or "isliin& on

somethin&! This is #ecause "omain o +reerences is the set o +otential

on the o+tions o choices! hile$ "omain o attitu"es is much #roa"er than

+reerences as +eo+le no nee" a reason to e+ress their attitu"es towar"s

somethin& that the% lie! Thus$ measurement o attitu"es an" +reerences

are >uite "ierent to each other! Preerences are #est measure" #%

choices #etween o+tions$ while attitu"es are #est measure" #% aective

res+onses to a sin&le o#ject! 7t turns out that attitu"es have a reasona#le

amount o sta#ilit%! This sta#ilit% o attitu"es len"s some sta#ilit% to the

choices that +eo+le mae$ #ut attitu"es are also susce+ti#le to a lot o

mani+ulations that are not allowe" to have an% eect in a rational theor%

o +reerences!

7n contin&ent valuation surve%s$ +articularl% when res+on"ents are

#ein& ase" to re+ort h%+othetical willin&ness to +a% (TP) or willin&ness

to acce+t (TA) or &oo"s that the% have no e+erience or e+ectation o

actuall% #u%in& or sellin&$ res+onses ten" to e+ress attitu"es!

3.2.3!e&iations 'et(een !ecision "tilit# and Experienced "tilit#

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hile in this su#to+ic$ researchers are consi"ere" on how ar "ecision

utilit% coinci"es with the e+erience" utilit%! The consi"eration are in the

contets o relation on a +erson8s acts o choice an" "ecision utilit% is an

e ante conce+t! 7t reCects on ever% thou&ht an" attitu"es inCuence thoseacts which are o#viousl% or those thou&hts an" attitu"es occur +rior to

the choices! 7n contrast$ e+erience" utilit% is the reCection8s conce+t o

the he"onic e+eriences that result rom acts o the choices!

Thus$ to #e a &eneral corres+on"ence #etween "ecision utilit% an"

e+erience" utilit%$ it seems to #e a necessar% con"ition that in"ivi"uals

are a#le to mae reasona#l% accurate +re"ictions o the he"onic

conse>uences on their actions! This is means that the% must #e ca+a#le

to an accurate aective orecastin& an" researchers are consi"ere" on

how ar these con"itions are hol"!

Researchers +erha+s that the most im+ortant Bn"in& o he"onic

+s%cholo&% on &iven state o aairs is "o not +ro"uce the same ha++iness

over time! As or man% actors that cause ha++iness an" unha++iness$

there is a ten"enc% or a"a+tation! Accor"in& to researchers$ i some

actors are continuousl% to o+erate over the time$ the corres+on"in&

e+erience o ha++iness or unha++iness will #ecomes less intense!

hile$ in the contet o economic sources o ha++iness$ a"a+tation

has #een "escri#e" as a he"onic trea"mill which is a su&&estive ima&e! As

a normal +eo+le$ we woul" lie to earn more mone%$ as we &et more

mone% #ut$ ultimatel%$ it "oesn8t &enerate more ha++iness! 3ase" on

Easterlin (1?H4$ 1??@)$ she has shown #% com+arin& "ata on income with

"ata on sel9re+orte" ha++iness$ the result is +o+ulation9wi"e increases in

real income "o +racticall% nothin& or su#jective well9#ein& in the lon&

run! This is #ecause$ within an% +erio" o time in cross9section$ there is a

mil" correlation #etween income an" ha++iness which is a#out 0!/!

*owever$ i in time series the correlation is essentiall% ero! or eam+le$

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in Ja+an a real +er ca+ita income increase" #etween 1?@F an" 1?FH$ while

su#jective ju"&ements o ha++iness are remaine" unchan&e"!

3.2.4)o( Can *e Measure Experienced "tilit#

This su#to+ic is "iscussin& a#out ualit% o uture e+eriences! *owever$ this metho" "e+en"s on the

accurac% o +eo+le8s aective orecastin&!

There are several wa%s o alternative strate&ies on this issue! irstl%

is$ we can measures the satisaction o a +erson8s retros+ective

assessment o her e+erience" utilit%! or eam+le$ i we want to measure

the eect o #lin"ness on ha++iness$ we can as matche" sam+les o

#lin" an" si&hte" +eo+le to res+on" on a Bve9+oint scale to the >uestion

o ITain& the &oo" with the #a"$ how ha++% an" contente" are %ou on

the avera&e now$ com+are" with other +eo+le=! This strate&% taes an

in"ivi"ual8s re+orte" ha++iness or su#jective well9#ein& as a measure o

his current e+erience" utilit%!

*owever$ researchers also sai" that there is another +ro#lem with

satisaction measures is its +articularl% relevant i the% are to #e use" to

&ui"e +u#lic +olic%! This is the statistical "iGcult% o i"enti%in& the

relationshi+ #etween overall satisaction an" s+eciBc causal actors!

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There is a thir" wa% o measurin& e+erience" utilit% which is we

can &ets closer to the realit% o +eo+le8s actual e+eriences! This is to

measure moment9#ase" ha++iness (-ahneman$ /000)! Thus$ i we want tomeasure the ha++iness o #lin" +eo+le$ we "on8t as them a#out the

overall ha++iness o their lives$ #ut we can measure the >ualit% o the

he"onic e+erience that #lin" +eo+le are havin&$ moment #% moment$ in

the course o their lives

#.# $onclusion

Researchers sai" that the i"ea o usin& e+erience" utilit% as the stan"ar"

o +olic% evaluation re>uires a major chan&e in the oun"ations o

normative economics$ even i this is a return to an ol"er tra"ition o

economic thou&ht! The chan&e involve" is so &reat that neither author is

rea"% to a"vocate it uncon"itionall%! At least three +hiloso+hical

o#jections nee" to #e #orne in min"! irst$ human well9#ein& ma% #e

thou&ht to "e+en"$ not onl% on the sum o moment9#%9moment aective

e+eriences$ as measure" #% an E"&eworthian he"onimeter$ #ut also on

other as+ects o lie$ such as autonom%$ ree"om$ achievement$ an" the

"evelo+ment o "ee+ inter+ersonal relationshi+s$ which cannot #e

"ecom+ose" into momentar% aective e+eriences! 2econ"$ it is +ossi#le

to view lie$ not as a Cow o +leasura#le an" +ainul e+eriences$ #ut as

the accumulation o a stoc o &oo" an" #a" memories!

As ar as this stu"% is concerne"$ the researchers sim+l% want to +ut

on the a&en"a o environmental economics the +ossi#ilit% o a

metho"olo&% o +olic% evaluation #ase" on e+erience" utilit%$ an" to

su&&est that such a metho"olo&% mi&ht circumvent some o the +ro#lems

that anomalies cause or state"9+reerence stu"ies!

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(.0 Journal #: Experienced versus !ecision Utility o& Income:

Relative or A)solute *appiness

The thir" journal that has #een chose is E+erience" versus ,ecision'tilit% o 7ncome: Relative or A#solute *a++iness! This stu"% is +re+are"

or the 5onerence


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as+iration levels (*ea"e% et al. 1??1)! More s+eciBcall%$ +eo+le who eel

unha++% ten" to have a hi&her as+iration levels! This su&&ests that the

he"onic9level9o9aect com+onent o ha++iness ma% #e more un"amental

than its co&nitive9evaluation com+onent! This calls or a +erha+s moreun"amental e+lanation o the income9ha++iness +ara"oes in terms o

the aective com+onent o ha++iness!

The% ma"e a "istinction #etween intrinsic &oals such as sel9

acce+tance an" aGliation an" etrinsic &oals such as Bnancial success

an" social reco&nition an" oun" that +ersons who stron&l% ocus on the

etrinsic &oals ten" to #e relativel% less ha++%! Thus$ a secon" +ur+ose o

this stu"% is to investi&ate the etent to which this a++roach ma% oer an

alternative e+lanation o the income9ha++iness +ara"oes!

(.2 Researc !esi"n

This stu"% is "ivi"e" into 4 sections! The% are$ section 1 is intro"uction$

an" section / &ives short review o the main em+irical Bn"in&s with

res+ect to the +ara"oes! hile section is to anal%ses the e+lanations

o these +ara"oes in terms o risin& as+irations an" +ositional

eternalities as well as the mie" evi"ence orm in"ivi"ual9cross9section

stu"ies! inall%$ section 4 is "iscusse" a#out the alternative e+lanation

su&&este" #% the intrinsic an" etrinsic &oals a++roach o -asser an"

R%an!

4.2.1Main Empirical +indings

A&ainst this #ac&roun"$ it is sur+risin& that ha++iness research usuall%

%iel"s low or at #est mo"erate correlations #etween income an" lie

satisaction in "evelo+e" countries! To #rin& some or"er into the "ata$

researchers ha" classiBe" the em+irical results #% two criteria! The Brst

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criterion is the level o a&&re&ation$ where a "istinction is ma"e #etween

an in"ivi"ual ocus an" national ocus! The secon" criterion is the

com+arison +ers+ective$ which can #e either a cross9section or a time9

series +ers+ective!

3ase" on the Bn"in&$ the most striin& results is that the

correlations #etween avera&e lie satisaction an" avera&e income in

"evelo+e" countries over time are not si&niBcantl% "ierent rom ero or

man% countries an" or most o the +erio"s! This is #ecause in the case o

la#our su++l% #ehaviour +eo+le shoul" now the eects o the lie

satisaction o leisure an" worin& time! Thereore$ at this sta&e o

research$ researchers can onl% sa% that +ositive income eects on lie

satisaction seem small in com+arison to what +eo+le e+ect on the #asis

o income9relate" #ehaviour an" state" +reerences! 7n the contet o this

stu"%$ researchers are assume" that the "ecision utilit% o alternative

income levels is &iven #% the e+ecte" contri#utions o income levels o

lie satisaction!

4.2.2!#namics o aspiration le&els and positional externalities

There are two main eects involve"$ namel% as he"onic a"a+tation an"

+ositional eternalities! 7n &eneral terms$ he"onic a"a+tation is the

re"uction o the he"onic such as ha++iness9 relevant which is res+onse to

a constant or re+eate" stimulus (e"eric an" Dowestein$ 1???)! The

secon" main eect can #e summarie" un"er the hea"in& o +ositional

eternalities! These can #e "ivi"e" into two in"s o eect! The Brst eect

is call secondary ination (*irata$ /001) which it is an analo&ous to the

e+ansion o the monetar% mass that re"uces the value o mone% with

res+ect to commo"ities! The e+ansion is in the avera&e o income in


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(1??H) sai" that there is a secon" in" o +ositional eternalit% coul" #e

calle" as “rame-o-reerence eect” ! This eect is wor to the etent that

the increase o +eo+le8s reerence &rou+8s consum+tion re"uces the lie

satisaction one "erives rom a &iven activit%$ increasin& +eo+le8sas+iration an" evaluation stan"ar"s!

*owever$ .eenhoven (1??1) ar&ues that an etreme claim on the

#asis o that view is unwarrante"! *e Bn"s that the hi&her the ,P o a

countr%$ the lower the correlation #etween in"ivi"ual ha++iness an"

income! This is consistent with the assum+tion that relative9income9

eects are just stron& or wea at low income levels as the% are at hi&h

income levels!

4.2.3 ,ntrinsic &ersus extrinsic goals

3ase" on .eenhoven (1??1)$ em+hasises that overall lie satisaction "oes

not entirel% "e+en" on co&nitive com+arison$ #ut also on how one eels

aectivel%! 7n his view$ overall lie satisaction "oes not onl% have a

co&nitive com+onent which in"icates the


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relative9income consi"erations an" a"a+tin& as+iration levels! ;n the

other han"$ the e+erience" utilit% is such a +erson "e+en"s more

stron&l% on the satisaction o intrinsic nee"s$ which is much less sensitive

to relative income!

(.# $onclusion

As+iration9level theor% is %iel"s much more s+eciBc +re"ictions on the

st%lise" acts o ero or low correlations #etween income an" lie

satisaction at "ierent level o anal%sis than the intrinsicK etrinsic9&oalsa++roach so ar! At the ver% least$ a clear cut "ichotom% #etween

as+iration9level9a++roaches in terms o relative ha++iness an" nee"s

a++roaches in terms o a#solute ha++iness "oes not a++ear to #e

a++ro+riate!

+.0 Journal (: A)solute Income, Relative Income, and *appiness

The ourth selecte" journal is a#out A#solute 7ncome$ Relative 7ncome$

an" *a++iness! This journal has #een written #% Richar" 3all an" -ater%na

5hernova on /00@! This stu"% uses "ata rom the orl" .alues 2urve% to

investi&ate how an in"ivi"ual8s sel9re+orte" ha++iness is relate" to the

level o her income in a#solute terms an" the level o her income relative

to other +eo+le in her countr%!

+.1 Motivation

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This stu"% eamines em+irical evi"ence on the relationshi+ #etween

income an" ha++iness! The s+eciBc o#jective is to com+are the

im+ortance o a#solute income an" relative income in "eterminin&

ha++iness on how much "oes a +erson8s ha++iness "e+en" on her incomein a#solute terms an" how much "oes her ha++iness "e+en" on her

income relative to the incomes o others Researchers also ase" to the

etent that ha++iness "oes it "e+en" on a#solute an" K or relative income$

how lar&e is the eect o income on ha++iness com+are" to the eects o

non9+ecuniar% actors such as +ersonal relationshi+s$ em+lo%ment an"

health Althou&h the relationshi+ #etween mone% an" ha++iness has #een

o +erennial interest to +hiloso+hers$ +s%cholo&ists an" other social

scientists$ contem+orar% interest in this issue amon& economists can #e

trace" lar&el% to a seminal +a+er #% Easterlin (1?H4)!

A +rominent h%+othesis +resente" in that +a+er was that +eo+le

care eclusivel% or almost eclusivel% a#out their incomes relative to the

national "istri#utions o income in the countries in which the% live$ an"

that$ &iven their relative income levels$ +eo+le care little or not at all

a#out their a#solute income levels! As Easterlin +ointe" out$ i +eo+le care

onl% a#out their relative incomes$ then a "istri#ution9neutral shit in a

countr%8s ,P +er ca+ita will not mae an%one ha++ier! 7 this is true$

+olic%maers$ "onors o orei&n ai"$ an" an%one else ho+in& to im+rove

the lives o +eo+le aroun" the worl" shoul" loo or strate&ies other than

sim+l% +romotin& &rowth!

+.2 Researc !esi"n

To answer all the >uestions in +revious +art$ researchers have con"ucte" a

research on it an" it8s "ivi"e" into several +art o anal%sis! The% are Part A

is >ualitative results on control varia#les$ Part 3 is >ualitative results on

a#solute an" relative income$ Part 5 is >uantitative results on a#solute

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an" relative income an" Part , is >uantitative results on non9monetar%

actors!

-.2.1Part /ualitati&e results 0 control &aria'les

Even thou&h$ this stu"% is ocusin& on the eects on ha++iness o

a#solute an" relative income #ut it is interestin& Brst or researcher to

comment #rieC% on the eects o the in"ivi"ual9 an" countr%9level

varia#les inclu"e" as controls! As overall conclusion on this +art as is on

avera&e$ the hi&her is the +er9ca+ita income o a +erson8s countr%$ the

ha++ier she is! The result in"icates that$ whatever an in"ivi"ual8s income

mi&ht #e an" however it com+ares to the incomes o others in the

countr%$ there are as+ects o livin& in hi&her9income countries that are

con"ucive to ha++iness!

A+art rom that$ researchers also s+eculate" that these are inclu"es

a #etter inrastructure an" +u#lic services$ &reater choice o consumer

&oo"s$ an" &reater o++ortunities to +ursue


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The Bn"in& that +eo+le are ma"e ha++ier #oth #% increases in their

a#solute incomes an" #% increases in their relative incomes is +erha+s

unsur+risin&! 3ut it is im+ortant to state$ #ecause +revious research has

sometimes asserte" or im+lie" that +eo+le must care eclusivel% a#out

one o these measures o income or the other!

-.2.3Part C /uantitati&e results 0 a'solute and relati&e income

7n this +art$ researchers ha" measure" the eects o a#solute an" relative

income #% usin& a ratio o two elasticities! Asi"e$ researchers also

conclu"e the results rom >uantitative test or this +art as ollows! or a

me"ian in"ivi"ual$ researchers oun" that the eect o a mar&inal chan&e

in relative income on ha++iness is several times lar&er than the eect o a

mar&inal chan&e in a#solute income! hile$ or joint "istri#ution o

a#solute an" relative income which o#serve" in the sam+le$ the eect on

ha++iness o a chan&e in relative income is t%+icall% lar&er than the eect

o a chan&e in a#solute income! As a conclusion$ relative income chan&es

have a &reater eect than a#solute income chan&es!

-.2.4Part ! /uantitati&e results 0 nonmonetar# actors

Althou&h the ocus o this stu"% has #een on the im+ortance o a#solute

an" relative income in "eterminin& ha++iness$ researchers sai" that it is

also im+ortant to com+are the im+ortance o these income measures to

non9+ecuniar% actors! Researchers ma"e these com+arisons on the #asis

o "iscrete chan&es in the varia#les #% usin& i"entities! The results has

illustrate" or the case o a me"ian in"ivi"ual onl% on the im+ortance o

a#solute an" relative income com+are" to three im+ortant non9+ecuniar%

actors inclu"in& marital status$ em+lo%ment status$ an" health!

The Bn"in&s +resent an im+ortant caveat to all the +rece"in&anal%sis is this stu"%! Althou&h we have oun" stron& evi"ence that$

/1


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ceteris paribus$ lar&er a#solute incomes an" lar&er relative incomes #oth

ten" to mae +eo+le ha++ier$ an" that chan&es in relative income ten" to

have a &reater eect on ha++iness than "o chan&es in a#solute income$

the results +resente" in this section show that the eects on ha++iness o several non9 +ecuniar% actors are &reater #% man% or"ers o ma&nitu"e

than the eects o either income measure!

+.# $onclusion

The main Bn"in&s are that #oth a#solute an" relative income is +ositivel%

an" si&niBcantl% correlate" with ha++iness! Luantitativel%$ chan&es in

relative income have much lar&er eects on ha++iness than "o chan&es in

a#solute income$ an" the eects on ha++iness o #oth a#solute an"

relative income are small when com+are" to the eects several non9

+ecuniar% actors! The Bn"in& that +eo+le "o care a#out their a#solute

incomes im+lies that a "istri#ution9neutral increase in avera&e income will

mae ever%one ha++ier! 7n that sense$ economic &rowth can increase

human welare! 3ut the Bn"in& that +eo+le also care a#out their relative

incomes a""s a note o caution o i some +eo+le8s incomes &row more

slowl% than others$ the relative losers coul" en" u+ eelin& worse o$

"es+ite the increases in their a#solute incomes! An" an% in"ivi"uals

whose a#solute incomes remain constant or all "urin& a +erio" o &eneral

economic &rowth lose unam#i&uousl%!

Researchers ha" also oun" stron& evi"ence that chan&es in relative

income ten" to have lar&er eects on ha++iness than "o com+ara#le

chan&es in a#solute income! This result su&&ests that$ even in an e+iso"e

o economic &rowth "urin& which ever%one8s a#solute income increases$

the welare losses o relative losers coul" #e lar&e! 7n terms o a&&re&ate

ha++iness$ an% a"verse "istri#utional conse>uences o &rowth coul"

swam+ the material #eneBts!

-.0 verall $onclusion

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As the overall conclusion$ utilit% will #e maimiin& i there is least o

errors in orecastin& the utilit% as mentione" in the Brst journal! hile$ the

utilit% also can #e maimie i the relative an" a#solute income is increase

as or as it will increase the ha++iness as mentione" in the thir" an"

ourth journal! *owever$ there is a nee" o major chan&es i &overnments

woul" lie to enhance this utilit% maimiation into a stan"ar" +olic% as

+er mentione" in the secon" journal!

Asi"e$ journal on this to+ic is ver% interestin& as +eo+le coul" un"erstan"

#etter on how +eo+le are maimiin& their utilit% with certain anomalies

as this to+ic is much closer to our "ail% routines! 7 woul" su&&est to all m%

rien"s to rea" this to+ic accor"in&l% as it8s a#le to enhance our

nowle"&e a#out the utilit%!

RE/ERE$E%

,aniel$ -! Richar"$ *! -! (/006)! 'tilit% Maimiation an" E+erience"

'tilit%! ournal o !conomics "erspective-#olume $%& 'umber (- )inter

$%%*! Pa&e //19/4

,aniel$ -! Ro#ert$ 2! (/00@)! E+erience" 'tilit% as a 2tan"ar" o Polic%

Evaluation! !nvironmental + ,esources !conomics $%%/ 0$1 (*(-(2(

Maarten$ .! Johannes$ .! (/00)! E+erience" versus ,ecision 'tilit% o

7ncome: Relative or A#solute *a++iness!

Richar"$ 3! -ater%na$ 5! (/00@)! A#solute 7ncome$ Relative 7ncome$ an"

*a++iness

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journals review on the utility maximization and happiness

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