Friday, December 4, 2015

Loewenstein and Ubel (2008) on Hedonic Adaptation

George Loewenstein and Peter A. Ubel, “Hedonic Adaptation and the Role of Decision and Experience Utility in Public Policy.” Journal of Public Economics 92(8–9): 1795-1810, 2008 [pdf].

• Choice-based measures of welfare are inappropriate because they assume what they need to demonstrate, that choice reflects (at least individual) welfare. Further, people mispredict what will make them happy, and are subject to all sorts of biases and preference reversals and framing effects and so on. 

• Experience-based measures of welfare are problematic, too, in part because people happily and repeatedly make decisions that they know will not increase their experience utility. Experience utility ignores non-hedonic dimensions of welfare such as a meaningful life or the acquisition and deployment of capabilities. 

• People who adapt (hedonically) to a disease or condition nevertheless would be willing to pay a considerable amount to be free of the disease. Can it really be the case that, given adaptation, more instances of paraplegia are welfare-neutral? 

Contra Bentham, not all pleasurable activities are equally valuable. Notice that wine experts tend to take less pleasure from average wines, but would not voluntarily renounce their expertise. They can appreciate nuance, and want to be able to. 

• Meaning in life could take different forms, including extending yourself, asserting free will, or having the capacity to feel anguish. Good life stories generally involve obstacles. Some altruistic activities lower happiness. People are willing to trade longevity for a good death. 

• For public decision making, we need to employ a hybrid of decision utility and experience utility. Keeping people informed about matters such as hedonic adaptation can help direct those decisions in desirable directions.

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.