What Do We Know and Don’t Know about Social Comparisons and Subjective Well-Being?

1. What Do We Know and Don’t Know about Social Comparisons and Subjective Well-Being? Erzo F.P. Luttmer March 17, 2006

2. What We Know: Remarkable “consistency” of findings in the papers written on this topic: Well-being appears to be relative • for a range of outcome measures (happiness, life satisfaction, hypothetical choices, suicide), • for a range of comparison groups (geographic or defined by age, race, education), • for a range of countries, and • for a range of datasets. Main exceptions: • Senik for the US and transition countries, and • Ravallion and Lokshin for the poor in Malawi.

3. What We Don’t Know (well enough): • How to interpret our measure of subjective well-being • The size of the relative effect • What is the reference group (does it matter?) • Can people (to some extent) decide how much they are affected by their reference group?  I’ll focus on the first question.

4. Measure of Subjective Well-Being Define: H ≡ Happiness ≡ Answer to a question such as: “Taking things all together, how happy would you say you are these days” (1-7 scale)

5. Example: Suppose you know how happy he would be in each neighborhood (i.e. also observe the counterfactual): A or B ? Neighborhood B, HB = 4 Neighborhood A, HA = 6

6. He Chooses Neighborhood B: B ! Neighborhood B, HB = 4 Neighborhood A, HA = 6 Did he make a mistake?

7. What’s a mistake? Define: H ≡ Happiness ≡ Answer to a subjective well-being question. V ≡ Objective Utility ≡ True well-being; whatever the person “should” maximize U ≡ Decision Utility ≡ Whatever rationalizes observed choices (revealed preference) We have: HA = 6 > HB=4 (b/c we know the counterfactual) UA < UB(by revealed preference) So: If VA < VB He made no mistake If VA > VB He did make a mistake

8. View A: Happiness is a good proxy for Objective Utility H = f(V) + ε where f(.) is monotonically increasing Usual list of evidence: • H correlated with Duchenne smile • H correlated with brain waves • H correlated with others’ ratings of this person’s happiness • H depends on observables in the “expected” way • etc.  He made a mistake(and for good measure, we explain why it is such a hard decision to get right)

9. View B: Happiness only captures part of Objective Utility V = g(H, duty, pride, altruism, etc) + ε with ∂V/∂H > 0 • He may not have made a mistake if he chose neighborhood B because the neighborhood is better for his children (even though it makes him miserable) Other examples: • “Overqualified immigrants working long hours in menial job for their family’s future” • “Writing a long reference letter for a student going into a private sector job”

10. View C: Decision should also depend on future levels of happiness  He may not have made a mistake if his neighborhood will make him happy in the future Other examples: • “Not going to a party in order to study for an exam” • “Having an orange instead of chocolate mousse for desert”

11. View D: Systematic biases in happiness answers H = h(V, X) + ε where X are individual characteristics or choices (e.g. mean neighborhood income).  He may not have made a mistake if neighborhood B makes him report lower happiness even if his “true well-being” is higher in neighborhood B. Examples: • “Response norming” • Different definitions for happiness by gender, cohort, ethnicity, education group, religion, etc.

12. How to Respond to Views B, C, & D? • There are no observed choices (U not available, so H is by definition the best measure for V) • We care just about happiness per se; it’s not a measure of what people should maximize. • Further research on the validity of happiness measures and/or use of alternative direct measures of well-being: • Physiological measures (not or less subject to response norming). But go beyond establishing correlations; we need to establish the difference is purely random. • Embed happiness questions in vignettes (to define the scale) • Run studies/experiments to see whether we can also measure “future happiness” or other components of V that our current happiness questions may not capture. • Other responses… ?