Sunstein (2020), “Behavioral Welfare Economics"

Cass R. Sunstein, “Behavioral Welfare Economics.” Journal of Benefit-Cost Analysis 11(2):196–220, 2020. 

• Economist Douglas Bernheim (2016) lists three premises when discussing individual welfare: (1) a person is the best judge of her wellbeing; (2) judgments are governed by our coherent, stable preferences; and, (3) preferences are what guides our choices. 

• None of these premises is self-evident; indeed, they might all be incorrect. 

• If people lack stable, consistent preferences, or if their choices are skewed by bias, how can we judge how well off they are, how good a job they are doing at serving their own interests? Further, their preferences might be shaped by rules and laws, so crafting rules to promote current interests might be a mistaken (or arbitrary) approach. 

• Behavioral science makes us suspicious of consumer sovereignty, or the claim that people are the preferred judges of their own situation, best positioned to make desirable self-regarding choices. 

• The behavioral evidence rightly undermines our unquestioned respect for consumer sovereignty, but we should be loath to turn it into general disrespect. It might make sense to start with deference to consumer sovereignty, but be willing to look to alternatives if evidence suggests welfare might otherwise be compromised. [Respecting consumer sovereignty as a default...!] 

• A standard description of rationality is that it consists of taking optimal (or, less stringently, reasonable) means of achieving your goals. 

• Nudges or other interventions that are designed to make choices more navigable, to make it easier for people to achieve their goals, are paternalistic with respect to means. 

• Economists generally are not in the business of questioning people’s goals, the ends they have in mind – but Professor Sunstein suggests that there can be strong evidence, in some settings, that (self-regarding) ends should be questioned: “The ends that people choose might make their lives go less well [p. 196].” 

• So, Sunstein starts from a position of alignment with Bernheim, where individual self-regarding choices are respected – but only if those choices are informed and free from behavioral biases. Further, Sunstein will not make a means/ends distinction: the ends could be problematic, just like the means can be. Nonetheless, “means” issues are generally what Behavioral Economics takes on. Tread carefully with “ends” stuff. 

• Bernheim thinks outsiders essentially lack standing to coerce the “direct” choices of others; the outsiders’ preferences are mere opinions and only one opinion, that of the individual involved, counts. Sunstein disagrees. [Benheim refers to choices that matter in themselves as "direct," whereas choices that only matter instrumentally in serving some larger purpose are "indirect."]

• People might be bad at forecasting the welfare they will receive from a choice, and prospective and experienced welfare needn’t match. (We might add retrospective welfare into the confusing mix, too.) 

• The three main contenders for what identifies “welfare” are: (1) preferences; (2) Subjective Well-Being; and (3) (the obtainment of) specified "objective" goods. All of these approaches to welfare are inadequate. 

• There are many circumstances in which people’s choices are wrong, with serious welfare consequences. And what is a direct choice? Perhaps “direct” issues only come in such high levels of abstraction – enjoy a good life – that choice architects in practice are unconstrained by respect for such issues. 

• Given the increased scope for intervention provided by behavioral considerations, how can they be held within reasonable bounds? Guideposts we can use for increasing our respect for individual choices are that the choices be informed, active, free of biases, and the product of a broad perspective.

Quispe-Torreblanca et al. (2019) on Non-fungible Credit Card Bills

Edika G. Quispe-Torreblanca, Neil Stewart, John Gathergood, and George Loewenstein, “The Red, the Black, and the Plastic: Paying Down Credit Card Debt for Hotels, Not Sofas.” Management Science 65(11): 5392-5410, November 2019.

• Is money fungible? Many studies show that the source of money influences how it is spent – for instance, “playing with house money” 

• Consider the repayment of borrowed funds. Presumably the highest interest debt should be most rapidly repaid. 

• But durable goods create a stream of future benefits, so perhaps people can reduce the psychological pain of paying by paying off debts of transient goods more rapidly than debts associated with durable goods. 

• A vacation (a transient good) paid for in advance will be more pleasurable, by this accounting (“prospective accounting”) than the same vacation which is paid for after the fact. 

• People will be more willing to pay interest for a durable good like a clothes dryer. Pre-paying for the dryer does not appreciably raise its hedonic payoff. 

• These mental accounting effects might affect original decisions to make purchases, as well as how repayment occurs.

• A large field experiment is conducted, using UK credit card data. 

• Nondurable goods are indeed much more likely to be paid off at the end of the month than similar bills for durable items – an effect that would be matched by something like a 15% increase in the APR on non-durable debt.

Adler, Dolan, and Kavetsos (2018) on Choosing to be Happy

Matthew D. Adler, Paul Dolan, and Georgios Kavetsos, “Would You Choose to be Happy? Tradeoffs between Happiness and the Other Dimensions of Life in a Large Population Survey.” Journal of Economic Behavior & Organization 139: 60-73, July 2017 [pdf].

• Measures of subjective well-being (SWB) come in three different varieties: (1) life satisfaction; (2) happiness (positive/negative affect); and (3) meaningfulness. These varieties are termed, respectively, (1) evaluative; (2) affective; and (3) eudaimonic components of SWB. 

• Decision utility (perceived when making a choice) and experience utility (the quality of lived experience) may differ; SWB seems to be a measure of experience utility. People might purposely choose an option that they know will not maximize their SWB. People might choose options in which their health is good, for instance, even if their SWB is lower than what they could achieve with alternative options.

• Adler, Dolan, and Kavetsos present pairs of options that trade-off SWB with some other characteristic, such as health. These options are presented in “choice” (which of two possible lives would you choose) and “judgement” (which of two possible lives is better) mode. The options are presented as either brief scenarios or (less brief) vignettes; the vignettes are intended to increase the salience of the trade-off presented between SWB and some other life dimension. The three different varieties of SWB are tested separately, and each arrayed against five life characteristics: income, health, family, career, and education. n≈13,000

• The US sample indicates a slightly higher average SWB than the UK sample, though the Americans are more anxious. (And higher anxiety lowers the likelihood of choosing the high SWB option.)

• About 60% of respondents choose the high SWB option. They also seem to be drawn somewhat more to the affective component of SWB. 

• Judgement questions lead to a slightly larger pro-SWB vote than do choice questions, as does presenting the options as vignettes. 

• People possessing higher SWB are more likely to choose the high SWB option. 

• People with children and more education and people who are male are less likely to be seduced by SWB. 

• People often choose good health over high SWB; they rarely choose career success over high SWB.

[John Stuart Mill comes to mind: "Whatever is desired otherwise than as a means to some end beyond itself, and ultimately to happiness, is desired as itself a part of happiness, and is not desired for itself until it has become so." -- from Chapter 4 of Utilitarianism; and the happiness that utilitarianism invokes is the happiness of all interested parties (Chapter 2 of Utilitarianism).] 

[For a related article, see here.]

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?

Shakespeare on the Trophy Effect, or the Endowment Effect, or Hot States and Cold States

They are both in either's powers; but this swift business

I must uneasy make, lest too light winning

Make the prize light.

(The Tempest, Act 1, Scene 2, Lines 628-630)

* * * * * * * * * * * * * * * * * * * ** * * * * * * * * * *

Yet hold I off. Women are angels, wooing:

Things won are done; joy's soul lies in the doing.

That she beloved knows nought that knows not this:

Men prize the thing ungain'd more than it is:

That she was never yet that ever knew

Love got so sweet as when desire did sue.

Therefore this maxim out of love I teach:

Achievement is command; ungain'd, beseech:

Then though my heart's content firm love doth bear,

Nothing of that shall from mine eyes appear.

(Troilous and Cressida, Act 1, Scene 2, Lines 438-447)

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

…but go with speed

To some forlorn and naked hermitage,

Remote from all the pleasures of the world;

There stay until the twelve celestial signs

Have brought about the annual reckoning.

If this austere insociable life

Change not your offer made in heat of blood;

If frosts and fasts, hard lodging and thin weeds

Nip not the gaudy blossoms of your love,

But that it bear this trial and last love;

Then, at the expiration of the year,

Come challenge me, challenge me by these deserts,

And, by this virgin palm now kissing thine

I will be thine…

(Love’s Labour’s Lost, Act 5, Scene 2, Lines 2736-2749)

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Since you are dear bought, I will love you dear.

(Merchant of Venice, Act 3, Scene 2, Line 1691)

Shakespeare on Happiness and the Easterlin Paradox

And happy always was it for that son

Whose father for his hoarding went to hell?

I'll leave my son my virtuous deeds behind;

And would my father had left me no more!

For all the rest is held at such a rate

As brings a thousand-fold more care to keep

Than in possession any jot of pleasure. 

         

(Henry VI, Part III, Act 2, Scene 2, lines 889-895)

* * ** * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Who would not wish to be from wealth exempt,

Since riches point to misery and contempt?...

My dearest lord, bless'd, to be most accursed,

Rich, only to be wretched, thy great fortunes

Are made thy chief afflictions.

(Timon of Athens, Act 4, Scene 2, Lines 1641-1642 and 1652-1654)

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 

Lord, who would live turmoiled in the court,

And may enjoy such quiet walks as these?

This small inheritance my father left me

Contenteth me, and worth a monarchy.

I seek not to wax great by others' waning,

Or gather wealth, I care not, with what envy:

Sufficeth that I have maintains my state

And sends the poor well pleased from my gate.

(Henry VI, Part II, Act 4, Scene 10, Lines 2904-2911)

Shakespeare on Our Inability to Predict What Will Make Us Happy

All things that are,

Are with more spirit chased than enjoy'd.

(Merchant of Venice, Act 2, Scene 6, Lines 921-922)

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Oh cousin!

That we should things desire, which do cost us

The loss of our desire! That nought could buy

Dear love, but loss of dear love!

(The Two Noble Kinsmen, Act 5, Scene 4, Lines 109-112, by John Fletcher and William Shakespeare, The Arden Shakespeare, third edition, Lois Potter, editor, Thomas Nelson and  Sons Ltd., 1997.)

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Past reason hunted, and no sooner had

Past reason hated, as a swallow'd bait

On purpose laid to make the taker mad;

Mad in pursuit and in possession so;

Had, having, and in quest to have, extreme;

A bliss in proof, and proved, a very woe;

Before, a joy proposed; behind, a dream.

(Sonnet CXXIX, Lines 6-12)

Frey and Stutzer (2014) on Mispredicting Utility

Bruno S. Frey and Alois Stutzer. “Economic Consequences of Mispredicting Utility.” Journal of Happiness Studies 15: 937–956, 2014 [pdf].

• People systematically mispredict the utility that they will receive from their consumption choices: intrinsic needs (competence, autonomy, and so on) are undervalued, while extrinsic rewards (money, status) are overvalued. 

• Utility mispredictions stem from mistakes concerning hedonic adaptation. Goods that satisfy internal needs are not as subject to adaptation as goods satisfying external rewards. People adapt to higher incomes, but not to commuting – indeed, they become slightly sensitized to the pains of commuting. 

• Frey and Stutzer model misprediction as arising from a change in the salience of an attribute between the ex ante choice to consume a good and the ex post consumption. Extrinsic attributes (salary, say) tend to be more salient than intrinsic features (time with friends) at the time of decision making. 

• Perhaps people adapt less to intrinsic characteristics because they get a reminder with each repetition, they are gifts that keep giving: each additional meeting with a friend brings new joy. 

• People do not adapt all that well to chronic health problems, unemployment, or the death of close relatives. Income increases are adapted to (but only 60% of the hedonic boost is lost). 

• Forecasts of utility are based on memories of past experiences, so the most memorable parts of an experience dominate. This leads to the peak-end rule, where the utility that lives in memory is roughly approximated by the average of the best moment and the quality of the ending. Intrinsic elements often involve duration, which is undercounted in memory. 

• Learning about mispredictions is surprisingly limited. 

• People like to provide a rational accounting for their actions; further, it is easier to explain to oneself and others the advantages of extrinsic dimensions than of intrinsic ones. 

• Markets tend to make prices and related attributes more focal. 

• Commuting time is a negative intrinsic dimension that receives short shrift in decision making. Lower rents and higher income do not, in practice, fully compensate for the pains of commuting, nor do other family members seem to gain from your long commute. Though a long commutes hurts life satisfaction, unemployment is much worse.

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.

Kahneman (2011), “Experienced Well-Being”

Daniel Kahneman, “Experienced Well-Being.” Chapter 37, pages 391-397, in Thinking, Fast and Slow, New York: Farrar, Straus and Giroux, 2011. 

• “Happiness” conflates experienced utility with remembered utility. Questions about subjective well-being probably do not map well with experienced utility. In a previous chapter (chapter 35, pages 377-385), Kahneman indicates that people’s memories of a past event tend to neglect the duration of the event (which is quite important as the event is being experienced), and that their assessment of a past event primarily will reflect the average of the peak level (of pain, say, for an aversive episode) and the state at the end of the event. 

• How to measure experienced, moment-by-moment, utility? One method (“experience sampling”) is to interrupt people at random times throughout the day, and to ask them what they are doing and how they are feeling about it. The Day Reconstruction Method provides another measure, where people are asked to map in detail their previous day’s activities, and their emotional state at the time of the activities. 

• The U-index measures the proportion of time people spend in an unpleasant state. The U-index exhibits significant variance: “a small fraction of the population does most of the suffering [p. 394].”

• You probably can improve your personal U-index by switching your leisure pursuits away from passive forms (watching television) to active forms (socializing). 

• Policy might be able to reduce the overall U-index, perhaps by encouraging socializing for elderly people or by reducing commuting times. A small decrease in the percentage of time spent in an unpleasant state is quite significant in terms of suffering averted. 

• Poverty can bring unhappiness, but money does not add to experienced well-being for household incomes above $75,000.

Markle, Wu, White, and Sackett (2014) on Reference Points in Marathons

Alex Markle, George Wu, Rebecca J. White, and Aaron M. Sackett, “Goals as Reference Points in Marathon Running: A Novel Test of Reference Dependence.” Fordham University Schools of Business Research Paper No. 2523510, November 12, 2014 [subsequently updated].

• Marathoners are asked for a time goal prior to the race; the notion is that these goals serve as reference points through which prospect theory-style preferences pivot. 

• Runners also are asked to indicate how happy they will be with meeting their time goal, or with beating it, or with not meeting it. Answers to these questions suggest that runners believe that their experience utility will display loss aversion, with the time goal as reference point. 

• Actual satisfaction with marathon performance indeed tracks performance relative to the time goal with loss aversion and diminishing sensitivity. People overestimate their degree of loss aversion (or their benefit from success), but nevertheless they do experience some aversion (or benefit). 

• Unlike the standard prospect theory gain-loss function, the satisfaction experienced by runners takes a jump discontinuity at the reference point. 

• Runners who indicated that their time goal was particularly important seem to display larger loss aversion. 

• The existence of additional reference points, such as past best time or most recent marathon time, also can mediate results. 

• Note that reference-dependent preferences might be “rational” if, as here, actual experienced utility displays reference dependence. 

• Marathoners are overly optimistic about their chances of meeting their time goal.