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.

Stumbling on Chocolate: Of TV and Tofu

If economists and psychologists are going to collaborate, they really ought to learn more about each other’s discipline. I have in mind the field of happiness research, and my case in point is a statement by psychologist Daniel Gilbert, author of the rapidly climbing bestseller Stumbling on Happiness. I am perhaps a bit unfair, taking an incidental statement out of context, but the topic is interesting in its own right, and this provides a useful point of departure:

…when something makes us happy we are willing to pay a lot for it, which is why the worst Belgian chocolate is more expensive than the best Belgian tofu.

The first part of that statement can hardly be denied (at least by an economist), but the second part I would question. If chocolate and tofu were both produced by monopolists, the chocolate monopolists would indeed be able to charge more than the tofu monopolists, just because people like chocolate better. But I have a hard time believing that “the worst” Belgian chocolate is monopolistically supplied. Surely there must be plenty of very close substitutes, both from other Belgian chocolatiers who make slightly better chocolate and from foreign chocolatiers who make chocolate that is at least almost as good. No matter how much people like chocolate, these competitors would have incentives to keep undercutting one another’s prices until the price came down to the cost of production. And if chocolate cost less to produce than tofu does, then, no matter how much people prefer chocolate, it would cost less than tofu. The reason chocolate is actually more expensive is that it costs more to produce.

This analysis raises the broader question of why good things generally seem to cost more than not-so-good things. I have several answers. First, to a large extent, the premise isn’t even true. Most people, most of the time, would rather watch TV than eat tofu, and yet broadcast TV is essentially free (except for the amortized cost of the TV set) whereas tofu has a nontrivial cost. Second, many good things – for example, the best Belgian chocolate – are in fact supplied monopolistically.

But the main reason, I think, is this: it’s not so much that good things are expensive as that expensive things are good. Gilbert in fact makes this point in his next sentence, but my reasoning is different than his. A basic premise of economics is the idea of diminishing marginal utility: the more you already have of something, the less additional happiness you get from an incremental amount. Things that don’t cost much, we already have plenty of, so an additional unit is not that good. Things that cost a lot, we don’t have much of, so an additional unit is very good. So, for example, why is going to a professional theatrical production better than going to a movie? Of course there are many who will say that the theatre is an inherently better art form, but for most people, I think, the answer is this: going to a play is better because we don’t get to do it as often. In other words, theatre is better than cinema specifically because theatre is more expensive.