Economics / Health economics / Research

New Theory of Consumer Behaviour and Research on Subjective Well-being

Feeling inspired today after reading a series of publications from Robert T. Michael and Gary S. Becker (1973) On the New Theory of Consumer Behaviour” to Betsey Stevenson and Justin Wolfers (2013)Subjective Well-being and Income: Is There Any Evidence of Satiation?”. Looking back on the 40+ years of advancement in human understanding of choices and behaviour through the lens of economics as a decision science, I couldn’t help but recalling a saying from an ancient thought leader in China:

“Knowing others is intelligence;
knowing yourself is true wisdom.
Mastering others is strength;
mastering yourself is true power.”
Lao Tzu, Tao Te Ching

At an era when technology is developing at a speed of light, how fast are we growing in our understanding of and the ability to master ourselves?

It is no surprise that Gary S.Becker was awarded the 1992 Nobel Prize of Economics “for having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including nonmarket behaviour”

Where is this line of research heading? I am not talking about behavioural economics that focus its attention on systematic biases. The greatest weakness of such theory is that it is hard to convince anyone such biases will exist in a prolonged period in equilibrium without being corrected. What seemed more promising is the research within economic framework as suggested by RT. Michael and GS. Becker in their work on the new theory of consumer behaviour as mentioned at the beginning.

Here is why — I am quoting from the comments and discussion piece on B. Stevenson and J. Wolfers by Gary S. Becker, Luis Rayo, and Alan B. Krueger:

“In this paper Betsey Stevenson and Justin Wolfers provide convincing evidence that self-reported happiness and measures of life satisfaction rise with income, not only at a moment in time within a country, but also between poorer and richer countries. The income coefficients are in fact quite close for the between- and within-country comparisons, contrary to findings in the literature with more-limited datasets. Depending on the definition of the relevant peer comparison group, these results can mean either that peer comparisons are weaker than previously believed (for example, if the peer comparison group is restricted to an individual’s country of residence), or simply that peer comparisons are of similar intensity between and within countries. On the other hand, the impact of changes in income over time is less clear, since the data give a mixed picture and current tests lack statistical power to allow a firm conclusion either way.

What do these results mean for the precise role of peer comparisons and habits in the determination of reported happiness and life satisfaction and, importantly, for the relationship between utility and these measures of well being? [Comments: These are typical questions theorists would raise based on empirical studies.] We concentrate our discussion on the latter question, which has received far less attention in the literature. Our conclusion is that although reported happiness and life satisfaction may be related to utility, they are no more measures of utility than are other dimensions of well-being, such as health or consumption of material goods.

To pretty much everyone who has written about happiness, an increase in income raises utility only if it also raises happiness. Similarly, various authors have interpreted the evidence from earlier studies that reported happiness did not rise over time when incomes rose as indicating that the utility of the typical person did not increase. On the basis of this interpretation, some authors have argued that governments should intervene in ways that would effectively discourage income growth.

A recent survey of the happiness literature addresses the question of whether happiness refers to utility, subject to reporting error, and mentions various types of possible evidence. The answers of friends of person A about the happiness of A generally are consistent with A’s answers about his own happiness, and his own answers are also consistent over time. Neurological measures, such as asymmetries in prefrontal activity, and physiological measures, such as the stress response, are correlated with the answers to happiness surveys. Some studies have also found that people behave in a manner consistent with their reports, such as trying to avoid situations (for example, unemployment) that reduce their self-reported happiness. Although Stevenson and Wolfers are not explicit about this point, they also seem to view happiness and life satisfaction as noisy measures of utility.

The above evidence indicates that self-reported happiness is indeed meaningful, but it does not imply that it is the same as utility. For example, if someone reports that she is healthy or owns an expensive SUV, her friends are likely to confirm these facts. Moreover, if she continues to remain healthy and to own this car over time, future reports are also likely to confirm these facts. One can also readily find behavior consistent with seeking to improve one’s health or to acquire an SUV. However, none of this evidence, no matter how precise, implies that health and SUV ownership can be equated with utility.

These examples suggest an alternative interpretation of the happiness data, namely, that happiness is a commodity in the utility function in the same way that owning a car and being healthy are. Consumption of particular commodities may be correlated with utility, but greater consumption of a commodity is not the same as greater utility. Indeed, following a change in consumption opportunities, the consumption even of important commodities may sometimes fall while utility increases. On this interpretation, happiness may be an important determinant of utility, but that does not mean that both coincide.”

Ph.D. in Economics with interests in Life Science, Behavioral Science, Health Economics Evaluation and Health Technology Assessment. Executive MBA student at The University of Chicago Booth School of Business in Hong Kong, graduating in 2020.

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