Gilovich and Kumar (2015) on Experiences versus Material Goods

Thomas Gilovich and Amit Kumar, “We’ll Always Have Paris: The Hedonic Payoff from Experiential and Material Investments.” Advances in Experimental Social Psychology 51: 147-187, 2015. [The version outlined below has different page numbers (and perhaps other discrepancies) from the version available here.]

• Experiences provide long-lasting memories, at least relative to material goods; experiences are gifts that keep on giving. Perhaps subjective well-being (SWB) and income would be more closely related if people shifted their spending from material goods to experiential goods. 

• Vacations, concerts, dining out: these are examples of experiential goods. Electronic gadgetry and clothing fall into the material goods category. People consistently report higher happiness from experiential goods relative to material goods. 

• Experiences are better for SWB for a variety of reasons. First, they are less subject to the adaptation which, over times, erodes the pleasure boost given by a material acquisition. Experiences are more pleasurable (and interesting) to talk about, and can become embedded in our identity, our story. 

• Adaptation is helpful in allowing people to come to terms with negative events, so if bad experiences are not subject to adaptation, we could suffer long-term from unpleasant moments. But experiences tend to be malleable, so that bad experiences – the vacation where it rained the whole time – tend to be looked at more favorably, through rose-tinted glasses, over time. Indeed, the negative features of experiences can become, in retrospect, their chief virtues. 

• Even in anticipation of consumption, experiences bring more pleasure than material goods. Waiting in line is less unpleasant when it is to see a play than to buy a gadget. And after the fact, people tend to think of money spent on experiences as having been better spent than that expended on material objects. 

• The social element that is attached to many experiences is one of the sources of their SWB advantages. And talking about experiences after the fact is one of their social elements. Talking about material possessions is a bit of a snooze fest. 

• The endowment effect is connected to an unwillingness to part with something that we “own”; people tend to show larger endowment effects, greater attachments, to potential experiences than to material goods. 

• Material possessions like cars are relatively easy to compare along quality dimensions – your neighbor’s Ferrari is probably better than your Ford. But who had a better vacation, or a better time at the concert? These are harder to compare, and hence, experiences to some extent protect us against unfavorable social comparisons. And if we enjoy our concert, we are not much concerned about opportunity costs, those potentially better concerts we sacrificed to go to “ours”. 

• If you buy a bad car, you regret it, you have buyer’s remorse. But the more frequent regret in the experiential realm concerns foregone opportunities, not buyer’s remorse. And it is easy to find the good in a bad experience, but not so easy to find the upside of a malfunctioning computer. “Surprises” tend to be positive when they arise during experiences, but negative when they are connected to material goods! 

• Some material goods are purchased with the intention of using them to enhance experiences, such as watching movies with your friends and family in a home video center. But perhaps the actual consumption of these goods is less social and less experiential and even less common than anticipated. If people have the experiences in mind when they make the purchases, they may be systematically fooled, as it were, into overspending on what turn out to be merely material goods. 

• Perhaps connoisseurs are able to convert material goods (collectibles, say) into experiential goods, by harnessing the same social, identity, and even narrative advantages that other types of experiences present. 

• Can we design cities, and our lives, to maximize experience?

Deaton and Stone (2013) Identify “Two Happiness Puzzles”

Angus Deaton and Arthur A. Stone, “Two Happiness Puzzles.” American Economic Review 103(3): 591-97, 2013 [pdf].

• If the Easterlin Effect is correct, and if it arises from the fact that people care about relative, not absolute income, then a rise in someone else’s income hurts me. That is, individual income increases in these circumstances involve a negative externality – and perhaps such increases should be dissuaded by a Pigovian tax, as with other negative externalities. 

• Deaton and Stone can find little or no evidence for the Easterlin Effect either within the US or across countries, however – this is their first happiness puzzle. Their non-result is especially strong when using an evaluative measure of happiness – the rung (0 to 10) of a ladder representing quality of life – as opposed to a hedonic measure, based on reported happiness (reported today concerning yesterday). Indeed, there is some evidence that living in the same zip code as rich people raises average happiness. For Deaton and Stone, universal increases in income will increase happiness markedly. 

• Religious individuals tend to report higher evaluative happiness – but more religious countries or states do not appear to be happier, even (in cross country data, though not in the US) after controlling for average income. This aggregation inconsistency is the second happiness puzzle, and it applies only to evaluative happiness, not hedonic happiness. (More religious countries report higher average hedonic happiness, but not higher evaluative happiness.) In the US, religious states also seem to have worse social problems, like crime and ill health. One speculative explanation is that social problems tend to cause people to be religious, and as the problems are ameliorated, religiosity declines.

Sacks, Stevenson, and Wolfers (2012), on Happiness, Income, and Easterlin

Daniel W. Sacks, Betsey Stevenson and Justin Wolfers, “The New Stylized Facts About Income and Subjective Well-Being.” Emotion 12(6): 1181- 1187, 2012 [pdf].

• The Easterlin Effect (or Paradox) suggests that while within a country at a point in time, richer people are happier than poorer people, that in that same country over time, rising incomes do not lead to more happiness, nor are richer countries happier than poorer countries. 

• A potential explanation of the Easterlin Effect is that people care about their relative income standing, and only compare themselves with their current compatriots. 

• Sacks, Stevenson, and Wolfers examine lots of data from many countries over many years, and find that there is essentially no evidence in support of the Easterlin Effect. Higher income is associated with higher happiness, whether the comparisons are made within a country, across countries, or over time. 

• The main measure that they use for subjective well-being employs a ladder analogy; people assess their lives on a ladder with steps 0 to 10, higher numbers meaning more satisfaction. 

• There is a declining marginal impact of income on happiness – an additional 100 dollars brings a larger dollop of happiness to a poor person than to a rich person. Further, the lack of support for the Easterlin Effect does not rule out the possibility that relative income might have a small influence on well-being. 

• The US remains a puzzle, as over the last 40 years, average income has nearly doubled, while happiness has slightly declined. Part of the answer might be that the increase in average happiness masks the fact that income inequality has increased, which means that many people did not share in the income gains.

Will Wilkinson (2007) on Happiness and Policy

Will Wilkinson, “In Pursuit of Happiness Research: Is It Reliable? What Does It Imply for Policy?” Policy Analysis no. 590, April 11, 2007.

• Wilkinson challenges three claims: (1) the US-market style approach and restricted welfare state are bad for happiness; (2) positional externalities justify progressive taxation; and, (3) economic growth is unimportant for happiness. 

• Do people understand their own affective states? If we have neural habituation, no. We can feel terrific and not notice. Think of all those people who were constantly suffering before antibiotics and other medical advances. 

• We can be sad and happy simultaneously. Happiness itself is multidimensional; even happiness researchers can’t agree on how to measure it. 

• Asking if it is better to live in Denmark or the US is a bit like asking whether it is better to live in the city or the country. It depends. The US actually ranks pretty high in measured happiness, incidentally. 

• There isn’t much evidence that lower inequality, a more advanced welfare state, or higher government spending, raise subjective well-being, even among the poor or the left-leaning. 

• While income inequality has been rising of late in the US, inequality in happiness is falling. 

• Economic freedom is a strong correlate with subjective well-being. 

• Culture allows us to embed status-seeking within positive sum environments.

Bruno Frey (2008) on “Happiness Policies”

Bruno S. Frey, “Happiness Policies.” Chapter 13, pages 151-175, in Happiness: A Revolution in Economics, Cambridge: MIT Press, 2008.

• Unemployment harms subjective well-being (SWB), as does inflation; but on a percentage-point-by-percentage-point basis, unemployment is worse. If we could lower the unemployment rate by 5% while raising the inflation rate by 8%, we would increase SWB. 

• Marriage is good for SWB, while separation and divorce are bad for it. Mobility destroys friendships and happiness. Procedural aspects, not only consequences, are important for SWB – people like fair procedures, or the opportunity to be heard. 

• Gross National Happiness looks at non-material aspects of well-being, and captures outcomes, not inputs. A National Happiness Index would weight everyone the same, whereas GDP essentially counts individuals proportionally to the value of their market activity. Much of GDP is based on inputs, too. The World Bank’s Human Development Index draws upon a capabilities approach to human flourishing. 

• It would be hard to turn SWB into a policy imperative in a reasonable way. Some forms of SWB are sustainable, others are liable to adaptation. SWM measures can be (and would be) manipulated if they were to be utilized in a deterministic fashion for policy purposes. It is probably best to use SWB to inform policymaking, but not to treat it as dispositive.

• We could try to tax to correct for positional externalities, but the usual problems of tax evasion and avoidance would be severe. Do we want to shift status competition into the man-on-horseback variety? Society functions better when status differentials are accepted, and if they are not so acceptable, when they are cloaked.

Robert Frank (2008) on Positional Externalities

Robert H. Frank, “Should Public Policy Respond to Positional Externalities?” Journal of Public Economics 92(8–9): 1777-1786, August 2008.

• The quality of a country’s military is almost a completely relative concept – countries compete not to be left behind. The importance of relative position, however, can stoke an arms race, where countries devote tons of resources to arms, without altering their relative positions. An arms control agreement, then, has the potential to make all sides better off, just as an enforceable contract could overcome the usual problem in a (multilateral) prisoners’ dilemma.

• Relative position seems to be an important element in lots of personal consumption decisions, such as the size of houses. But for other consumer choices, such as those concerning safety risks at work, absolute levels seem to dominate concerns with relative ranking. Some goods are more “positional” than others.

• Perhaps Easterlin’s “paradoxical” results are due to income being a positional good.

• Frank suggests that for positional goods, an increase in one person’s absolute consumption constitutes a harm to others – one that legitimately could be controlled by public policy. Frank proposes that we replace our income tax with a proportional consumption tax. And if consumption taxes correct for positional externalities, they are efficiency enhancing. Further, surely the social value of a marginal increase in public services exceeds the value of marginal private consumption – shades of Galbraith's "affluent society."

• If the rate at which house sizes grow were to slow down, there would be little effect on subjective well-being; housing, and celebrations of special occasions, are “hyper-positional” goods.

Stevenson and Wolfers (2008) on the Easterlin Paradox

Betsey Stevenson and Justin Wolfers, “Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox.” Brookings Papers on Economic Activity, pages 1-87, Spring 2008.

• The Easterlin “Paradox”: Within countries at a point in time, income and subjective well-being (SWB) are positively correlated: richer people are happier. This relationship between income and SWB does not seem to hold when looking between countries, or in data over long periods of time within a country. 

• One possible resolution of the Easterlin Paradox is that reference-dependent preferences might be at work. People are happier if they are relatively rich within their country, but they don’t compare themselves with people in other countries or people thirty years ago. If happiness depends on relative income, maybe we need to have highly progressive taxation, as higher income (or work effort) for one person “imposes” a relative deprivation cost upon everyone else. 

• Stevenson and Wolfers re-examine the evidence, and the Easterlin Paradox disappears: time series and cross-country studies display essentially the same correlation between SWB and (log) income as is calculated from within-country cross-sections. On average, higher income goes with higher SWB. 

• Life satisfaction and happiness are not identical concepts, with happiness more about affect (in Kahneman's typology, System 1). Happiness is less strongly correlated than is SWB with income. Tanzania and Nigeria exhibit high happiness, low SWB. 

• A rise in income of $100 contributes more to happiness in poor countries than in rich countries – but it contributes to higher happiness in both rich and poor countries. 

• The US is the exception, with a small fall in SWB between 1972 and 2006, despite rising average income. The US data might reflect stagnation in middle-class income.