Working Paper: NBER ID: w19329
Authors: Arik Levinson
Abstract: The economics of "happiness" shares a feature with behavioral economics that raises questions about its usefulness in public policy analysis. What happiness economists call "habituation" refers to the fact that people's reported well-being reverts to a base level, even after major life events such as a disabling injury or winning the lottery. What behavioral economists call "projection bias" refers to the fact that people systematically mistake current circumstances for permanence, buying too much food if shopping while hungry for example. Habituation means happiness does not react to long-term changes, and projection bias means happiness over-reacts to temporary changes. I demonstrate this outcome by combining responses to happiness questions with information about air quality and weather on the day and in the place where those questions were asked. The current day's air quality affects happiness while the local annual average does not. Interpreted literally, either the value of air quality is not measurable using the happiness approach or air quality has no value. Interpreted more generously, projection bias saves happiness economics from habituation, enabling its use in public policy.
Keywords: Happiness; Behavioral Economics; Public Policy
JEL Codes: D03; H41; Q51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| annual average air quality (Q53) | reported happiness (I31) |
| habituation (C92) | happiness response to air quality (Q53) |
| daily air quality (Q53) | happiness response (I31) |
| daily air quality (Q53) | reported happiness (I31) |
| daily air quality (Q53) | marginal willingness to pay for improvements in air quality (Q51) |