Sunday, October 08, 2006

Utilitarianism, Happiness, and Optimism

I’ll admit I don’t know a whole lot about happiness research. But as a utilitarian, and as an economist trained in the neoclassical paradigm, I’m rather skeptical. I’m skeptical, in particular, of attempts to equate quantitative, empirical measures of happiness with utility in the philosophical sense or with “true” happiness in any quantitative sense.

A case in point is the frequent finding that optimism is conducive to happiness. Suppose that a study of long-term investors found that optimistic investors obtained better returns. That wouldn’t surprise me at all, but I wouldn’t interpret it to mean that optimism is conducive to better investment results. Indeed, I would conclude exactly the opposite. People are naturally risk-averse; consequently more risky investments must have higher expected returns in order to attract investors. If an investor has average preferences but is “optimistic” in the sense of overestimating expected returns, that investor will choose riskier investments, because he or she will judge (wrongly) that those investments are worth the risk. Similarly, people who have optimistically biased expectations about their lives will be willing to take risks that, on average, result in better outcomes. This doesn’t mean that optimism is good; it just means that the measure of outcomes is not accounting sufficiently for the severity of the bad outcomes among the minority of optimists whose risks do not pay off.

I don’t doubt that optimism has its virtues. Surely certain optimistic biases can be good for the individual if they compensate for other pessimistic biases. And the optimistic bias of entrepreneurs, even if it isn’t good for them, is good for the rest of us, because it compensates for the market’s inability to offer them full diversification of risks. I won’t rule out the possibility that optimistic bias directly affects happiness to an extent that might outweigh the effect of the irrational behavior it produces. But any study that purports to demonstrate that point empirically would require a subtlety of design not easy to achieve.

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11 Comments:

Blogger Gabriel Mihalache said...

Investors are pretty much a self-selection group... if you're not optimistic enough, you don't invest at all. You get a state job, or something. Optimist investors are the most optimist among optimists.

My problem is happiness research is that it uses self-reported happiness. This turns out to be time-inconsistent, but that might surely be an emotional/conscious effect.

Empirical work grounded in reveal preference is 10 times more worthy to me than stated preference or self-reported happiness.

Unfortunately, the area of happiness research has attracted a bunch of paternalists and would-be world-planners, wanting to keep us aways from our doughnuts or the like... the sort of paternalism they can't get away with if they want to ground their policy in economics.

Mon Oct 09, 02:44:00 AM EDT  
Blogger true dough said...

Are cynics of happiness indices really equally cynical about measurements of sentiment amongst traders?

With happiness indices, the actual coefficients are not precise indicators for some of the reasons knzn describes, and because the broad survey targets a heterogeneous group. In contrast, measurements of optimism are (as far as I know) fairly focussed surveys of traders and the trading climate and thus intentionally capture subjectivity/sentiment from a homogenous crowd. When aggregate optimism in period (t+1) rises above optimism in period (t), doesn't this signal something to investors? Sentiment of traders goes up, prices tend to follow? Hence, are happiness indices and optimism measurements really in the same murky boat?

The area is so new to me that I probably shouldn't comment, but knzn provoked me with his interesting post!

Tue Oct 10, 06:20:00 PM EDT  
Anonymous Dean Chung said...

I've read Daniel Gilbert's book on happiness, which talks quite a bit about the state of happiness research.

The main thrust of his book are that people have difficulty judging happiness, especially about their happiness in the past. They are even worse at predicting happiness in the future.

I remember that his thrust is that to attempt to measure happiness, the best you can do is to use self-reported *immediate* responses (that basically there is no other baseline to work from), to layer on large sample groups to try to reduce the noise (which he asserts reduces the volatility of the measurement), and the obligatory warning about being careful in experiment design. Sounds pretty similar to any other social science.

Gabriel-- from what I read, the stuff that Gilbert mentioned from happiness research was focused on how much we misjudge happiness, and is actually really interesting in its own right merely from a self-reflective view. I didn't find it (at least from my admittedly small sample size of one) to be authoritarian.

Wed Oct 11, 09:55:00 AM EDT  
Blogger Battlepanda said...

I find research into happiness fascinating, precisely because it reveals a side of human nature that is so maddeningly inconsistent. That is why I can recommend Daniel Gilbert's book on happiness highly (it is very entertaining) but am rather bearish on actually utilizing the findings in a practical way.

Case in point. Colonoscopy saves lives, but nobody likes getting a tube jammed up their ass (well...not gonna go there). Studies have shown that patients rates a colonoscopy as less painful if, after the active probing stage, the probe was left in the rectum for a few medically unnecessary minutes rather than withdrawn immediately. It's hypothesized that we weight the final impression of an experience disproportionately when we evaluate that experience. Therefore, five bonus minutes of mild discomfort tricks the patient into thinking that the whole thing wasn't so bad after all.

What a dilemma for the utilitarian, for what do you define as utility in this case? The second-by-second sensations as experienced by the patients' body? Then you must encourage doctors to pull the probe as soon as the procedure is over to minimize disutility (pain). But if you extend the definition of utility to the person's impression of the event after its' been shaped by memory, then you would recommended the doctors to leave the probe in for longer. But wait! In the long run, the patient is more likely to get another colonoscopy if his impression of the first was not so negative. If more cancers can be stopped because people are more willing to get colonoscopies, then there is a massive improvement in welfare...but how do you weigh that gain with the massive loss of trust in doctors if the ruse was ever discovered...

This is not to say that I don't think happiness research can yield any practical insights at all. To go back to the medical example, if any procedure is somehow naturally divided into a more painful and a less painful stage, I think in the light of this research any medical professional would do well to get the most painful part over with first before doing the less painful part of the procedure, assuming of course that the order is medically neutral.

Fri Oct 13, 01:44:00 PM EDT  
Anonymous Anonymous said...

This is all very interesting, but at the risk of sidestepping the argument, I'd like to point out that optimism and happiness aren't entirely distinct concepts. Thus, stating that optimism causes happiness is a quasi tautology.
I haven't read the happiness research yet, and I wonder about the psychometric properties of the measures being used in that research. I'd venture to say that responses to a question on one's outlook on the future (optimism) would be likely be considered to be part of any happiness scale or score, which probably should embody responses to a variety of questions designed to measure various aspects of happiness. In fact, one's outlook on one's current situation, or on the moment, coupled with one's outlook on one's future could be argued to be the main components of happiness.
Once solid comprehensive and stable measures of happiness are developed (and some surely already exist), economists can have a jolly time studying the economics of happiness.

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