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Is man doomed to progress?

Is man doomed to progress?. Claudia Senik PSE and University Paris IV Sorbonne. Current experienced utility from past and future periods of time. Intertemporal consumption effects (lags and leads) u t = u t [ …, x t-1 , x t , x a t+1 , x a t+2 , ..]

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Is man doomed to progress?

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  1. Is man doomed to progress? Claudia Senik PSE and University Paris IV Sorbonne

  2. Current experienced utility from past and future periods of time • Intertemporal consumption effects (lags and leads) • ut = ut [ …, x t-1, x t , xat+1, xat+2 , ..] • Experienced utility versus ex ante decision-utility (Kahneman et al. 1997): emotion

  3. Why does it matter? • Decisions based on false expectations? Easterlin: experienced utility turns out to be different (lower) from expected utility. • This calls growth into question. • But emotions associated with future events (Loewenstein, Caplin and Leahy ) preference for improving sequences, (Frank and Hutchens). • This can reconcile adaptation with growth.

  4. Objective of the paper: • find evidence a preference for improvement (ceteris paribus) • welfare effects of past change and expected future improvement.

  5. Data • Russian Longitudinal Monitoring Survey (RLMS) • Panel: 9 waves 1994-2004 • After attrition (of the wealthiest and the youngest) about 25 272 observations, i.e. 2808 individuals surveyed at every wave. • RLMS Project: University of North Carolina at Chapel Hill, Paragon Research International, Russian Academy of Medical Science and Russian State Statistical Bureau.

  6. Subjective variables as proxies for inter-temporal spillovers

  7. Visual Evidence • Construct four quartiles of total cumulated real expenditure over the period 1994-2004. • Expectations (1994-2004): • count the number of periods where individuals declare that they expect their situation to improve • … to remain stable • … to deteriorate. • Past improvement (2001-2004): • count the number of periods where individuals declare that they their situation has improved • … has remained stable • … has deteriorated • Plot the cumulated happiness score of each group of people.

  8. Orders of magnitude: • the happiness scale goes from 1 to 5. • the average cumulated happiness score over 9 rounds is 20.85 • the standard deviation of cumulated happiness is 5.69 • the minimum happiness score is 4 • the maximum happiness score is 44. • cumulated happiness is observed for 2808 individuals.

  9. For the poorest quartile, expecting improvement at 6 periods out of 9, rather than 0, increases the cumulated happiness score from 18 to 23, which represents 1 standard deviation of the happiness score. • For the other quartiles, the increase in happiness score is even greater and reaches about 10 points, i.e. almost 2 standard deviations. • Expecting an improvement at least once is equivalent, in terms of happiness score, to moving up to the immediately upper consumption quartile.

  10. Past improvement is also a factor of increased satisfaction, although to a lesser extent than expected improvement. • Cumulated happiness scores increase at best by approximately 5 point, • Except for the poorest quartile where observing improvement 4 times along seems to boost cumulated happiness.

  11. Stability, whether expected or past, is associated with higher happiness scores. • The effects are much smaller than those of improvement. • The impact of past stability is stronger for the two lowest consumption quartiles. • Interpretation: uncertainty and the risk of poverty are most threatening at low levels of income so that stability is then seen as an escape from this risk.

  12. Estimating life satisfaction

  13. Importance of controlling for the whole array of inter-temporal spillovers. Useful distinction between contrast effects and consumption effects (Loewenstein, 1987): • Past contrast effect: adaptation, hedonic treadmill. • Future contrast effect: jail prisoner close to being released • Past consumption effect: hedonic capital (buffer stock) • Future consumption effect: savouring, dread, hope, fear.

  14. Trade-off between the utility of expected improvement and the disutility of working; • > use the sub-sample of individuals aged 18 to 65 years old, and having worked at least once during the survey.

  15. Positive role of EXPECTED IMPROVEMENT • The sum of the coefficients on PAST CONSUMPTION and PAST CHANGE is significantly different from that of CURRENT CONSUMPTION. • => change exerts an effect per se.

  16. Robustness1. Are we sure to be dealing with experienced utility? • Definition of health by the World Health Organization (1946): “Health is a state of complete physical, mental and social well-being and not merely the absence of disease or infirmity”; • health = experienced utility? • => Check whether self-assessed health depends on expectations.

  17. Robustness2. But maybe expectations cause happiness not as such, but because they reflect the objective dynamic situation of some individuals; => is the effect of expectations driven uniquely by people who have experienced an upward income mobility and expect this to continue ?

  18. Robustness 3. Omitted variable or reverse causation • Instrument expectations • Stutzer (2003) intruments aspirations using aggregate income variables. • We use the predicted income of the next period as an instrument for expectations • i.e. the post-estimation typical income of one’s professional group (age, age square, gender, industry, diploma, occupation and regional price level).

  19. Conclusions • Past and future increases in living standard per se have a positive impact on current moment-utility. • Preference for increasing sequences.

  20. A built-in disposition? • “People have a gestalt notion of an ideal distribution of outcomes in time” (Camerer and Loewenstein, 2004) • Psychologic tellic theories : Michalos (1985), Diener and Lucas (2000), Pomerantz et al. (1998), Emmons (1986). • Biology:nervous system sensitive to deviations. • Sysyphe: man is doomed to progress, even though attaining his goals does not always make him very much more happy.

  21. Source: RLMS 1994-2004, population aged 18 to 65 years old.

  22. 3 alternative measures of current consumption effects Current consumption effect1: ECONOMIC SATISFACTION Tell me, please: How satisfied are you with your economic conditions at the present time? Fully satisfied /Rather satisfied /Both yes and no /Less than satisfied /Not at all satisfied. Current consumption effect 2: ECONOMIC RANK And now, please imagine a nine-step ladder where on the bottom, the first step, stand the poorest people, and on the highest step, the ninth, stand the rich. On which step of the nine are you today? 01 . . . 02 . . . . 03 . . . . 04 . . . 05 . . 06 . . . . 07 . . . . 08 . . . . 09 Current consumption effect 3: LOG REAL EXPENDITURE OF THE HOUSEHOLD. ***** Past consumption effect: same variables lagged one period.

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