RelativeconsumptionandsatisfactionDr.RussellJamesIII,UniversityofGeorgiaPastExpectedFutureAlternativeNearbyadditionalRelevantObservedCurrentMultipleAlternativeOurchoicesandoursatisfactionaredrivenbythecomparisonswemakeBehavioralEconomicsConceptsPastExpectedFutureAlternativeNearbyadditionalRelevantObservedCurrentMultipleAlternativeHedonicAdaptationPlaceboEffect;StereotypesEndogenousDeterminationofTimePreferenceAnchoring;ParadoxofChoiceLossAversion;EndowmentEffect;StatusQuoBiasAvailabilityEffectsRelativeStandingPeerEffects;AfundamentalideaofstandardeconomicsHigherincomemeansgreaterconsumptionandthereforegreaterutilityandsatisfactionBut,somepiecesofthepuzzledon’tseemtofit!B.Frey(U.Zurich),A.Stutzer,2002,Whatcaneconomistslearnfromhappinessresearch?JournalofEconomicLiterature,40,402-435.DanielKahneman(Princeton)andAlanB.Krueger(Princeton),2006,DevelopmentsintheMeasurementofSubjectiveWell-Being,JournalofEconomicPerspectives,20(1),3-24.A.Clark,P.Frijters,andM.Shield,2008,RelativeIncome,Happiness,andUtility:AnExplanationfortheEasterlinParadoxandOtherPuzzles,JournalofEconomicLiterature,46(1),95–144A.Clark,P.Frijters,andM.Shield,2008,RelativeIncome,Happiness,andUtility:AnExplanationfortheEasterlinParadoxandOtherPuzzles,JournalofEconomicLiterature,46(1),95–144Whydon’tweseenationalsubjectivewell-beingrisingwithnationalincomeindevelopedcountries?=ocV5bGHdYagStandardeconomics•MoremoneymeansgreaterconsumptionandthereforegreaterutilityandsatisfactionRelativestanding•Mylevelofsatisfactiondependsuponmyrelativeconsumptionv.thoseinmycomparisongroupSomegoodsaremore“positional”Goodswhererelativeleveliskey•Cars•Houses•Fashion•Professionalattire•IncomeGoodswhereabsoluteleveliskey•Health•Safety•Relationships•VacationtimeS.J.Solnick(U.Vermont)&D.Hemenway(Harvard),2005.Arepositionalconcernsstrongerinsomedomainsthaninothers?AmericanEconomicReview,95,147-151“ConspicuousConsumption”•ThorsteinVeblen•TheoryoftheLeisureClass(1899)•“ConspicuousConsumption”whenpeoplepreferagoodbecauseitismoreexpensive.Thedisplayoftheitemprojectsrelativestanding.Conspicuousconsumption•ShippingmagnateAristotleOnassiswantedaspecialyacht•Christina–325ft.•Barstoolswithwhaleivoryfootrestsandleathermadefromwhalepenis.•Mosaictilefloorofswimmingpoolrosetobecomeadancefloor.Relativestandinginconspicuousconsumption•Shippingcompetitor,StavrosNiarchosbuilttheAtlantisIIwiththeinstructionofmakingit50-ftlongerthantheChristina.•1990Turama,3-ftlongerthantheAtlantisII•Etc.,Etc.Yougraduatefromcollegeandyourincomechangesfrom$0to$29,000.Yourfriendsallgetjobsmaking$50,000.Howdoyoufeel?Standardeconomics•Moremoneymeansgreaterconsumptionandthereforegreaterutilityandsatisfaction•$0v.$29,000Relativestanding•Mylevelofsatisfactiondependsuponmyrelativeconsumptionv.thoseinmycomparisongroup•$29,000v.$50,000Whichworldwouldyouchoose?WorldA:Youandyourfamilyliveinaneighborhoodwith3,000sq.ft.houses,therestofthetownlivesinneighborhoodswith2,000sq.ft.houses.WorldB:Youandyourfamilyliveinaneighborhoodwith4,000sq.ft.houses,therestofthetownlivesinneighborhoodswith6,000sq.ft.houses.RelativeincomeandhedonicadaptationDanAriely’s“Thetruthaboutrelativity”=mAc2VdnK78cRelativeincomeandlifesatisfactionStudy:Apanelstudyofabout10,000peoplein965differentneighborhoodsQuestion:Comparingindividualswiththesameincome,dotheyfeelworsewhenothersaroundthemhavemoreincome?Whatdoyouthink?a)Peoplefeellesshappywhentheincomeofthosearoundthemgoesup.b)Peoplefeelmorehappywhentheincomeofthosearoundthemgoesup.c)Peopleareunaffectedbywhatthosearoundthemearn.Luttmer,E.(Harvard),2005,Neighborsasnegatives:Relativeearningsandwell-being.QuarterlyJournalofEconomics,120(3),963-1002.RelativeincomeandlifesatisfactionFinding:“higherearningsofneighborsareassociatedwithlowerlevelsofself-reportedhappiness.”Itappearsthatpeoplehave“utilityfunctionsthatdependonrelativeconsumptioninadditiontoabsoluteconsumption.”Luttmer,E.(Harvard),2005,Neighborsasnegatives:Relativeearningsandwell-being.QuarterlyJournalofEconomics,120(3),963-1002.GlobalresultsfromWorldValuesSurveyR.Inglehart,ModernizationandPostmodernization(Princeton,1997).Overallincomemaystillbeimportantforlifesatisfactioninrelativelypoornations.R.InglehartandH-D.Klingemann,Genes,CultureandHappiness,MITPress,2000.R.InglehartandH-D.Klingemann,Genes,CultureandHappiness,MITPress,2000.Incomeeffectweakensforthetophalf1.922.12.22.32.42.5010000200003000040000500006000070000AverageHappinessRatingHouseholdincome/(√HouseholdMembers)AverageHappinessByU.S.IncomeDecile(1994-1996)OriginalchartfromB.Frey(U.Zurich),A.Stutzer,2002,Whatcaneconomistslearnfromhappinessresearch?JournalofEconomicLiterature,40,402-435.50thpercentileofincomeSimilarresultsfrom35yearsago1.922.12.22.32.42.5010000200003000040000500006000070000AverageHappinessRatingHouseholdincome/(√HouseholdMembers)AverageHappinessbyUSIncomeDecile(1972-1974)OriginalchartfromB.Frey(U.Zurich),A.Stutzer,2002,Whatcaneconomistslearnfromhappinessresearch?JournalofEconomicLiterature,40,402-435.50thpercentile