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The Fatal Human Flaw That Keeps Us From An Economy Based On Happiness

In theory, happiness is a better indicator of prosperity in a country than traditional economic measurements. But human psychology has a tendency to get in the way.

Measuring and comparing the overall happiness of societies has become a pop discipline that we’ve covered more than a few times (see here and here). Bhutan, with its "gross national happiness" indicator, helped kicked off the trend.

But what if a country like Costa Rica (number six on this list of the world's happiest countries) suddenly got competitive and wanted to raise its overall happiness? You’d think it would make sense for the government to start implementing policies—whether in education, taxes, or crime—that maximize the total happiness in society.

In fact, this is exactly what a growing number of "happiness" economists think about. Traditionally, economists assist policymakers in deciding how to make tough policy tradeoffs by trying to put a monetary value on people’s preferences: how much taxpayer money they should spend to, say, make the air a bit cleaner or the crime rate lower.

Happiness economists are taking a slightly different approach. They ask a large number of people about their overall happiness, and by comparing the answers, tease out what portion of "happiness" can be attributed to living in the smog of Los Angeles versus the pristine air of Honolulu versus, say, getting a lower tax rate or a raise at work.

The tactic can be used to help answer policy questions like: How much parkland should a city provide? Or, is it worth investing public resources in sports teams? Do the benefits of increased police patrols outweigh the costs? One of the first studies to use this kind of happiness analysis found that, for people living near an airport in Amsterdam, a 50% increase in noise reduces well-being by "as much as a 2.2% drop in income."

A new paper by Georgetown University economist Arik Levinson points out some major problems with using "happiness" as a way to answer these questions. The two biggest are the flip side of the same coin, and have to do with underlying aspects of human psychology:

1) For better or worse, people adjust to their circumstances

People who win the lottery might be happier initially, but after a certain amount of time (a year, say) are no happier than they were before. Conversely, people who suffer debilitating injuries may initially be less happy, but after a few years have completely adapted to their new reality.

2) People aren’t rational and tend project momentary circumstances onto long-term decisions

If you have a full belly when when you go food shopping, you might not buy as many groceries as you need for the week. If you ask people about their long-term outlook on life on sunny days, you’ll get happier answers.

Levinson demonstrated the combination of these two effects by showing that the current day’s air quality affects how people rate their happiness, but the local annual average air quality does not. Essentially, our perceived happiness does not react well to long-term changes (i.e. changes brought by public policies, usually) and overreacts to temporary changes.

"If we clean up the air, this says people are no happier as a consequence," explains Levinson, even though we know, objectively, that they are better off, he says. "That casts a lot of doubt, to me, on the use of happiness in public policy."

[Images: Daisies via Shutterstock]

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  • Vin Valluri

    People aren’t rational and tend to project momentary circumstances onto long-term decisions 

  • Jason Brashares

    It seems to me that the claim that "self-reported happiness" is not a good metric for setting public policy is not the same as the claim that "general happiness" is not a good factor in the public policy equation. What I mean is that, when setting public policy, it IS a good practice to consider how the policy will affect human happiness. Not from the perspective of public polls and self-reporting (which are notoriously relative) but from an objectively ascertained set of happiness criteria determined by good scientific data and analysis of what makes us happy. It is NOT good practice to assume that people always make the best decisions about their own happiness and create policies based on that. Good policy should be based on objective evidence, not subjective anecdote.

  • Nelson Jacobsen

    I have proposed using MarginalUtilityofPublicGood.or... as a way to lens what the .Gov, NGO's and Non-Profits are doing in the economy.  Profit subjugates the output since  traditionally in a For -Profit company the benefit is for the few, not the many so output is constricted and expanded for the exact opposite reason we need most things done in pubic policy (i. e.  Public Good).  I also believe we are evolving and like the 14 year old blue phenom Quinn Sullivan sings I believe we're all  "Getting There". 

  • Anthony Reardon

    Interesting subject to tackle Jessica,

    I think prosperity does have a direct correlation to happiness. People that are prospering are generally going to be happier, but happiness does not necessarily cause prosperity. Both can have causal affects autonomous from each other, but neither can be completely qualified mutually exclusive of the other.

    So in practical application, I think Angela makes a good point. The conclusion that happiness is not a good basis for risk/ investment is faulty.  Not that it is a self-sufficient basis either. People that build up happiness as a driver set themselves up for the criticism. People that put down happiness as a driver lack a completely sound framework for basing their decisions by.

    To say that you should not invest in say air quality or a sports team because they are purely sentimental endeavors that won't really make people happy as a consequence lacks depth and breadth of insight. A lot of this has to do with how you define the concept or state the problem. In an increasingly competitive world, perhaps public health, safety, recreation, and entertainment are key drivers for attracting both business and consumers into the economy, thus leading to greater prosperity, and consequently greater overall happiness. 

    Best, Anthony

  • angelakowalski

    An erroneous conclusion based on, as it is explained, barely more than a skewed case study. This is a better example of influencing via propaganda that human happiness isn't "worth pursuing."