Journals Review: Microeconomics (PEA6014)

1.0

Introduction

This journal reviews are consists of four journals. Each journal will describe
on their introduction, motivation on why the study has been conducted,
the research design and the conclusion for every journal. Journal that has
been chosen is all about the Utility Maximization and Happiness.

2.0

Journal 1: Anomalies Utility Maximization and Experienced

Utility
The journal was written by Daniel Kahneman and Richard H. Thaler. This
journal was published in Volume 20 in Journal of Economics Perspectives
on winter 2006. The authors of this are journal are Daniel Kahneman who
is a Eugene Higgins Professor of Psychology and Professor of Public Affairs,
Woodrow Wilson School. Both of these responsibilities are at Princeton
University, Princeton, New Jersey. The other author of this journal is
Richard H. Thaler which is a Ralph and Dorothy Keller Distinguished
Service Professor of Behavioral Science and Economics and he is also a
Director of the Center for Decision Research, Graduate School of Business,
and both responsibilities are at the University of Chicago, Chicago, Illinois.

2.1

Motivation

Research has been conducted for reason of the assumption that utility is
always maximized allows often surprising inferences about the nature of
the desires that guide peoples ever-rational choices. This methodology
has had many uses and undeniably has charm for economists, but it rests
on the shaky foundation of an implausible and untested assumption. In
this study, researcher had discussed a version of the utility maximization
hypothesis that can be tested and they found that it is false. The analysis
of the study has begins with a distinction between two senses of the term
utility. One is, Decision utility has also been called wantability which is
inferred from the choices and used to explain choices and the second is
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Journals Review: Microeconomics (PEA6014)

experienced utility refers to the hedonic experience associated with an

outcome.
According to researchers, the older interpretation of utility is on the
question of whether choices maximize utility has a simple meaning which
is whether people choose the options that they will enjoy the most. As in
modern decision theory, which is ignoring the distinction and the question
is quite different form the olders, which is in modern theory they are
focusing on the preferences of consistent on each other and on the
axioms of rational choice. A long series of modern challenges to utility
theory, starting with the paradoxes of Allais (1953) and Ellsberg (1961)
and including framing effects, have demonstrated inconsistency in
preferences. This study has reviewed empirical challenges to utility
maximization which is return to the old question of whether preferences
optimize the experience of outcomes.
Much of this study has focused on two things. They are the
necessary of condition for utility-maximizing choices on the ability of
economic agents to make accurate or at least unbiased and the forecasts
of the hedonic outcomes of potential choices. The case that researchers
reviewed shows that this condition is not satisfied where people do not
always know what they will like and

they are often make systematic

errors in predicting their future experience of outcomes and its directly fail
to maximize their experienced utility.
In this study, researchers mentioned on method of measuring errors
in hedonic forecasts. Researchers assumed that when people making a
choice at time t0, that is mean they are makes a forecast of the utility of
an outcome that will be experienced at a later time t 1. These forecasts of
the utility is called as hedonic forecasts which it is may be explicit (can be
observable) or implicit which is the they must be inferred from the agents
choices

at

t0.

Systematic

errors

of

hedonic

forecasting

can

be

demonstrated in several ways. There are, by comparing hedonic forecasts

with direct measures of experienced utility which is by creating situations
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Journals Review: Microeconomics (PEA6014)

in which choices lead to demonstrably inferior experiences or by showing

the hedonic forecasts or choices are influenced by factors that are clearly
irrelevant.
Apart from that, the researchers also were not claimed that people
do not know on what they like because they do know well about it as
when the t1 is immediately follows the t0 or when the experience is
familiar. This is same as we are rarely surprised by the taste of the second
spoonful from a bowl of soup. However, people do not always know what
they will like in future, and they are likely to do error most severely when
the temporal gap is long, when the agents state and when the
circumstances are vary between t1 and t0.

2.2

Research Design

In this study the researches had discussed four areas in which errors of
hedonic forecasting and choice have been documented. They are, the first
is where the emotional or motivational state of the agent is very different
at t0 and at t1, the second is where the nature of the decision focuses
attention on aspects of the outcome that will not be salient when it is
actually experienced, the third is when choices are made on the basis of
flawed evaluations of past experiences and the fourth is when people
forecast their future adjustment to new life circumstances.
2.3.1 Effects of the Current Emotional State
The example of hungry shopper always has been used to illustrate a
proposition of systematically explored in numerous studies. This example
is suitable to forecasts of future hedonic and emotional states are
anchored in the current emotional and motivational state. Based on
Loewenstein, ODonoghue and Rabin (2003), the outcome of this situation
has been labelled as projection bias since peoples are seemingly
projecting

their

current

mental

state

onto

future.

In

addition,

Loewenstein has documented what he calls a hot-cold empathy gap.

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Journals Review: Microeconomics (PEA6014)

This hot-cold empathy gap occurs when peoples were arouse such as by
a hunger or anger, people will mispredict on how they will behave in a
cool state and the vice versa. In both situations they are underestimate
the impact of the changes from their current state.
For an example, the hungry shopper is not a hypothetical as it is
well established that shoppers who are hungry tend to buy food as if they
expected to remain permanently famished (Nisbett and Kanouse, 1968).
However, if the shoppers who are given a muffin to eat before entering
the supermarket are more likely to restrict their shopping to the items on
their list (Gilbert, Gill and Wilson, 1998). Form these situations, the effect
are easily explained as the attractiveness of food will be increases with
current hunger.
In addition, there is another demonstration of projection bias is
provided by Read and Van Leeuwen (1998), who were offered office
workers a choice between a healthy and an unhealthy snack which is fruit
or candy bar to be delivered in a week. Its either at a time when the
workers would expect to be hungry in late afternoon or full on right after
lunch. Then, some of the workers made the choice when they were
hungry, others when they were full. There are two main findings that can
be explained towards this situation. First, workers are more likely to option
for the naughty snack if it will be delivered when they expect to be
hungry. This choice is express a correct hedonic forecast which is the
hungry people are indeed more likely than sated people to choose candy
over fruit for immediate consumption.
2.3.2 Effects of the Context of Choice
In this subtopic, the researchers had discussed on a search of differences
between the state of the individual at time t0 and t1, which may cause
discrepancies between the utility of a good in decision or forecast and its
utility in actual experience. Two aspects of the task that is performed at t0
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Journals Review: Microeconomics (PEA6014)

have been investigated as a source of such discrepancies. They are,

whether the task requires the evaluation of a single good or a comparison
value of two competing goods and whether a decision involves multiple
goods that will be consumed at different times.
Based on Hsee (2000), he observed that the context in which
consumers make choices is likely to induce similar reversals because
consumers often make choices in joint evaluation which is for example
when comparing televisions at a store, but subsequently experience only
the option they chose. Small differences in sound quality will not be
noticeable without a standard of comparison. In contrast, comparison is
not required to evaluate whether an object is ugly or beautiful. Consumers
are therefore susceptible to the mistake that Hsee (2000) described,
consumers are paying too much attention to the small but noticeable in
the store about the difference in sound quality and too little attention to
the appearance. Comparative effects can arise even when the task does
not explicitly require it.
Thus, Read and Loewenstein (1995) were introduced the term of
diversification bias to refer on the excess of variety seeking in
simultaneous choice. The term implies that sequential choice leads to
higher experienced utility. This prediction was confirmed in several studies
in which participants reported their enjoyment of decisions made either
simultaneously or sequentially. The authors proposed that simultaneous
decisions cause the attribute of variety to be much more salient in
simultaneous choice than it will be at the time of actual consumption.
2.3.3 Learning from the Past
On this subtopic, researchers said that consumers choices often involve
experiences that they have already had. This is because of the
preferences and hedonic forecasts are informed by personal memory in
these cases and might therefore be expected to be extremely accurate.
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Journals Review: Microeconomics (PEA6014)

However, hedonic forecasts that are based on stored evaluations of past

encounters will be biased if these memories are biased, and several
sources of such biases of remembered utility have been established. In
addition, based on Stone, Broderick, Porter and Kaell (1997) said,
evaluations of the past are anchored on the individuals emotional state
when the evaluation is made for the forecasts on the future. Biased
evaluations of past episodes were documented in a series of early
experiments in which participants reported retrospective evaluations of
experiences that varied in both hedonic value and duration.
2.3.4 Mispredicting Adaptation
According to the researchers, people must sometimes predict the hedonic
effect of a long-term change in life circumstances. Social psychologists
Daniel Gilbert and Timothy Wilson originally coined the term affective
forecasting to describe this mental activity. Many of the changes that
people make in their life circumstances are driven by the wish to improve
their happiness or reduce their unhappiness and inevitably invoke some
idea of the hedonic effects of these circumstances. In addition, people also
have strong intuitions about the effects on well-being. As Gilbert and
Wilson (2000) noted, mistakes on affective forecasting can cause
erroneous choices, which is called as miswanting.
The central result of many explorations of affective forecasting and
intuitive theories about well-being has been described as a focusing
illusion, which Schkade and Kahneman (1998) summarized by a maxim
that is Nothing in life matters quite as much as you think it does while
you are thinking about it. In other words, there is a powerful tendency to
exaggerate the importance of any aspect of life when one focuses
attention on it. The bias is easily explained as the task of evaluating the
impact of a change in life circumstances inevitably draws attention to the
distinctive aspects of the change. The explanation is straightforward as
when people asked to report on their well-being. Peoples are normally
focusing more on their central aspects of life and pay little attention to the
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Journals Review: Microeconomics (PEA6014)

climate. This is because of the climate is more important in affective

forecasts than in actual wellbeing. Thus, the focusing illusion helps resolve
these two central puzzles in the study of wellbeing. The first puzzling
observation is that people often adapt surprisingly well to important
changes in their lives. The second puzzling observation is that the first is
surprising. Although adaptation is ubiquitous, it is poorly represented in
the naive theory of well-being from which affective forecasts are drawn.

2.3

The

Conclusion

conclusion

from

this

body

of

research

is

that

people

are

systematically wrong in their expectations about the life circumstances

that will increase or decrease their happiness, which in turn implies that
life choices that people make in their pursuit of happiness are also likely to
be wrong. The fact that people are sometimes failing to maximize utility
does not imply on someone else such as spouses, parents, employers or
governments that should usurp the right to choose.

3.0

Journal 2: Experienced Utility as a Standard of Policy

Evaluation

Title of the second journal is Experienced Utility as a Standard of Policy

Evaluation which has been written by Daniel Kahneman and Robert
Sugden. This journal was published in Springer 2005 under Environmental
and Resources Economics section. The main purpose of the study is
researchers would like to explore the possibility of basing economic
appraisal on the measurement of experienced utility which is utility as
hedonic experience rather than decision utility which is utility as a
representation of preference. Because of underestimation of the extent of
hedonic adaptation to changed circumstances and because of the
focusing illusion which is exaggerating the importance of the current
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Journals Review: Microeconomics (PEA6014)

focus of ones attention, individuals forecasts of experienced utility are

subject to systematic error. Such errors induce preference anomalies
which the experienced utility approach might circumvent. The day
reconstruction method of measuring experienced utility is considered as
a possible alternative to stated preference methods.

3.1

Motivation

While, the purpose of this study is to explore the implications of basing

economic policy evaluation on experienced utility which is on utility as
hedonic experience, the concept of utility that was used by Jeremy
Bentham and by 19th-century economists. The researchers suggested
that this approach might provide a way of avoiding some of the problems
that so-called anomalies cause for current methods of stated preference
analysis. Aside, the researchers also said that it is too early to be
confident in claiming that a methodology of stated happiness is a viable
alternative to that of stated preference. However, the researchers try to
show that this approach has enough promise to be worth further
development. As part of this investigation, the researchers had discussed
some recent findings concerning adaptation to pleasurable and painful
experiences and peoples failure to anticipate such adaptation.
Thus, the researchers suggested that these properties of human
psychology are among the factors causing anomalies in contingent
valuation. However, these properties also create certain difficulties for the
measurement of experienced utility. Therefore, the researchers were
considered on how those difficulties might be overcome.

3.2

Research Design

Journals Review: Microeconomics (PEA6014)

This study is including of four parts which are Decision Utility,

Experienced Utility and Contingent Valuation, Contingent Valuation and
Decision Utility, Deviations between Decision Utility and Experienced
Utility and How Can We Measure Experienced Utility.
3.2.1 Decision Utility, Experienced Utility and Contingent Valuation
In this subtopic, researchers mentioned that there are two different
interpretations of the term utility which have been used in the literature
of economics. In its original interpretation, which was derived from
Bentham, utility is interpreted in hedonistic terms, as a measure of
pleasure and pain. While in the 19th century, Edgeworth (1967) suggested
the idea of what he called as the hedonimeter which is an imaginary
instrument of analogous with the barometers used in weather recording
stations. This instrument could measure the level of pleasure or pain that
an individual was experiencing at any moment and then plot it as a
continuous function of time. The integral under the curve plotted by the
hedonimeter would be a measure of the individuals happiness for a given
period. Thus, there is a developing strand in the recent research literature
of economics is try to revive this interpretation of utility as experienced
utility.
Aside, the researchers also mentioned that decision utility is a
representation

of

preferences,

and

the

concept

of

preference

is

understood in terms of choice which is a persons preferences are the

mental entities that explain his choices and are revealed in those choices.
If utility is interpreted as decision utility and if economic agents are
assumed to be rational utility maximisers, there is no need to worry about
whether people are choosing things that they will enjoy consuming.
Merely by being rational in the formal sense of acting on consistent
preferences, they are maximising decision utility. Apart from that, in this
study, the researchers explored the option of using the maximisation of
experienced utility as the normative criterion for economic analysis.
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Journals Review: Microeconomics (PEA6014)

3.2.2 Contingent Valuation and Decision Utility

In this subtopic, researchers start their writing with a question of Do
responses to contingent valuation questions provide information about
decision utility?. Then researchers said that one of the major problem
towards this response is it may reveal attitudes rather than preferences.
This is because the logic of attitudes and the logic of preferences are quite
different. Preferences are extensional that are comparisons on alternative
states of the world. In contrast, attitudes are non-extensional that
prompted by references as its report to the events in mind.
Other than that, researchers also mentioned on the important aspect of
the attitude is the immediate emotional response of liking or disliking on
something. This is because domain of preferences is the set of potential
on the options of choices. While, domain of attitudes is much broader than
preferences as people no need a reason to express their attitudes towards
something that they like. Thus, measurement of attitudes and preferences
are quite different to each other. Preferences are best measured by
choices between options, while attitudes are best measured by affective
responses to a single object. It turns out that attitudes have a reasonable
amount of stability. This stability of attitudes lends some stability to the
choices that people make, but attitudes are also susceptible to a lot of
manipulations that are not allowed to have any effect in a rational theory
of preferences.
In contingent valuation surveys, particularly when respondents are
being asked to report hypothetical willingness to pay (WTP) or willingness
to accept (WTA) for goods that they have no experience or expectation of
actually buying or selling, responses tend to express attitudes.
3.2.3 Deviations between Decision Utility and Experienced Utility

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Journals Review: Microeconomics (PEA6014)

While in this subtopic, researchers are considered on how far decision

utility coincides with the experienced utility. The consideration are in the
contexts of relation on a persons acts of choice and decision utility is an
ex ante concept. It reflects on every thought and attitudes influence those
acts which are obviously for those thoughts and attitudes occur prior to
the choices. In contrast, experienced utility is the reflections concept of
the hedonic experiences that result from acts of the choices.
Thus, to be a general correspondence between decision utility and
experienced utility, it seems to be a necessary condition that individuals
are able to make reasonably accurate predictions of the hedonic
consequences on their actions. This is means that they must be capable
to an accurate affective forecasting and researchers are considered on
how far these conditions are hold.
Researchers perhaps that the most important finding of hedonic
psychology on given state of affairs is do not produce the same happiness
over time. As for many factors that cause happiness and unhappiness,
there is a tendency for adaptation. According to researchers, if some
factors are continuously to operate over the time, the corresponding
experience of happiness or unhappiness will becomes less intense.
While, in the context of economic sources of happiness, adaptation
has been described as a hedonic treadmill which is a suggestive image. As
a normal people, we would like to earn more money, as we get more
money but, ultimately, it doesnt generate more happiness. Based on
Easterlin (1974, 1995), she has shown by comparing data on income with
data on self-reported happiness, the result is population-wide increases in
real income do practically nothing for subjective well-being in the long
run. This is because, within any period of time in cross-section, there is a
mild correlation between income and happiness which is about 0.2.
However, if in time series the correlation is essentially zero. For example,

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Journals Review: Microeconomics (PEA6014)

in Japan a real per capita income increased between 1958 and 1987, while
subjective judgements of happiness are remained unchanged.
3.2.4 How Can We Measure Experienced Utility
This subtopic is discussing about How Can We Measure Experienced
Utility. Thus, in order to measure the experienced utility, researchers
mentioned that we need a method of measurement which elicits
information about actual states of hedonic experiences and not attitudes
to issues or affective responses to transitions as we need to avoid the
focusing illusion. In addition, we also need to generate information in a
form that will allow us to identify or predict the hedonic effects of specific
policy options.
One possible method of measuring experienced utility indirectly is to
measure anticipated utility of a persons ex ante beliefs about the hedonic
quality of future experiences. However, this method depends on the
accuracy of peoples affective forecasting.
There are several ways of alternative strategies on this issue. Firstly
is, we can measures the satisfaction of a persons retrospective
assessment of her experienced utility. For example, if we want to measure
the effect of blindness on happiness, we can ask matched samples of
blind and sighted people to respond on a five-point scale to the question
of Taking the good with the bad, how happy and contented are you on
the average now, compared with other people?. This strategy takes an
individuals reported happiness or subjective well-being as a measure of
his current experienced utility.
However, researchers also said that there is another problem with
satisfaction measures is its particularly relevant if they are to be used to
guide public policy. This is the statistical difficulty of identifying the
relationship between overall satisfaction and specific causal factors.
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Journals Review: Microeconomics (PEA6014)

There is a third way of measuring experienced utility which is we

can gets closer to the reality of peoples actual experiences. This is to
measure moment-based happiness (Kahneman, 2000). Thus, if we want to
measure the happiness of blind people, we dont ask them about the
overall happiness of their lives, but we can measure the quality of the
hedonic experience that blind people are having, moment by moment, in
the course of their lives

3.3

Conclusion

Researchers said that the idea of using experienced utility as the standard
of policy evaluation requires a major change in the foundations of
normative economics, even if this is a return to an older tradition of
economic thought. The change involved is so great that neither author is
ready to advocate it unconditionally. At least three philosophical
objections need to be borne in mind. First, human well-being may be
thought to depend, not only on the sum of moment-by-moment affective
experiences, as measured by an Edgeworthian hedonimeter, but also on
other aspects of life, such as autonomy, freedom, achievement, and the
development of deep interpersonal relationships, which cannot be
decomposed into momentary affective experiences. Second, it is possible
to view life, not as a flow of pleasurable and painful experiences, but as
the accumulation of a stock of good and bad memories.
As far as this study is concerned, the researchers simply want to put
on

the

agenda

of

environmental

economics

the

possibility

of

methodology of policy evaluation based on experienced utility, and to

suggest that such a methodology might circumvent some of the problems
that anomalies cause for stated-preference studies.

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4.0

Journal 3: Experienced versus Decision Utility of Income:

Relative or Absolute Happiness

The third journal that has been chose is Experienced versus Decision
Utility of Income: Relative or Absolute Happiness. This study is prepared
for the Conference The Paradoxes of Happiness in Economics at Milan on
2003. The journal has been written by Maarten Vendrik and Johannes
Hirata.
A central finding in happiness research is low correlations between
income and happiness. This is remarkable since most people seem to
attach a high value to a rise in their income as indicated in their behaviour
in labour supply and stated preferences (Frank, 1999 and Easterlin, 2001).

4.1

Motivation

The purpose of this study is to investigate the plausibility of Easterlin and

Frank by a careful analysis of the results of the econometric or statistical
studies. Researchers gave a general conclusion form this analysis is that
especially the estimation results of Stutzer (2002) in favour of the
aspiration level theory of Easterlin (2001) look convincing and that the
absence of any evidence for an influence of relative income variables in
the study of Diener et al. (1999) may due to misspecifications of such
influence.

On the other hand, the results of Stutzer also suggest that the
explanations of the income-happiness paradoxes in terms of rising
aspirations and positional externalities may only be partial. Moreover,
there is some evidence that, contrary to what is assumed in the
aspiration-level theory which is causality is not so much running from
aspirations levels towards happiness, but rather from happiness towards
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Journals Review: Microeconomics (PEA6014)

aspiration levels (Headey et al. 1991). More specifically, people who feel
unhappy tend to have a higher aspiration levels. This suggests that the
hedonic-level-of-affect component of happiness may be more fundamental
than its cognitive-evaluation component. This calls for a perhaps more
fundamental explanation of the income-happiness paradoxes in terms of
the affective component of happiness.

They made a distinction between intrinsic goals such as selfacceptance and affiliation and extrinsic goals such as financial success
and social recognition and found that persons who strongly focus on the
extrinsic goals tend to be relatively less happy. Thus, a second purpose of
this study is to investigate the extent to which this approach may offer an
alternative explanation of the income-happiness paradoxes.
4.2

Research Design

This study is divided into 4 sections. They are, section 1 is introduction,

and section 2 gives short review of the main empirical findings with
respect to the paradoxes. While section 3 is to analyses the explanations
of these paradoxes in terms of rising aspirations and positional
externalities as well as the mixed evidence form individual-cross-section
studies. Finally, section 4 is discussed about the alternative explanation
suggested by the intrinsic and extrinsic goals approach of Kasser and
Ryan.

4.2.1 Main Empirical Findings

Against this background, it is surprising that happiness research usually

yields low or at best moderate correlations between income and life
satisfaction in developed countries. To bring some order into the data,
researchers had classified the empirical results by two criteria. The first
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Journals Review: Microeconomics (PEA6014)

criterion is the level of aggregation, where a distinction is made between

an individual focus and national focus. The second criterion is the
comparison perspective, which can be either a cross-section or a timeseries perspective.

Based on the finding, the most striking results is that the

correlations between average life satisfaction and average income in
developed countries over time are not significantly different from zero for
many countries and for most of the periods. This is because in the case of
labour supply behaviour people should know the effects of the life
satisfaction of leisure and working time. Therefore, at this stage of
research, researchers can only say that positive income effects on life
satisfaction seem small in comparison to what people expect on the basis
of income-related behaviour and stated preferences. In the context of this
study, researchers are assumed that the decision utility of alternative
income levels is given by the expected contributions of income levels of
life satisfaction.

4.2.2 Dynamics of aspiration levels and positional externalities

There are two main effects involved, namely as hedonic adaptation and
positional externalities. In general terms, hedonic adaptation is the
reduction of the hedonic such as happiness- relevant which is response to
a constant or repeated stimulus (Federick and Lowestein, 1999). The
second main effect can be summarized under the heading of positional
externalities. These can be divided into two kinds of effect. The first effect
is call secondary inflation (Hirata, 2001) which it is an analogous to the
expansion of the monetary mass that reduces the value of money with
respect to commodities. The expansion is in the average of income in
real terms or in terms of commodity purchasing power. Aside, Frank
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Journals Review: Microeconomics (PEA6014)

(1997) said that there is a second kind of positional externality could be

called as frame-of-reference effect. This effect is work to the extent that
the increase of peoples reference groups consumption reduces the life
satisfaction one derives from a given activity, increasing peoples
aspiration and evaluation standards.

However, Veenhoven (1991) argues that an extreme claim on the

basis of that view is unwarranted. He finds that the higher the GDP of a
country, the lower the correlation between individual happiness and
income. This is consistent with the assumption that relative-incomeeffects are just strong or weak at low income levels as they are at high
income levels.

4.2.3 Intrinsic versus extrinsic goals

Based on Veenhoven (1991), emphasises that overall life satisfaction does

not entirely depend on cognitive comparison, but also on how one feels
affectively. In his view, overall life satisfaction does not only have a
cognitive component which indicates the degree to which an individual
perceives her aspirations to be met. It also has an affective component
representing the degree to which the several of affect draw on the
gratification of basic bio-psychological needs.
An approach which implies between decision utility and experienced
utility of income can be refer to Kasser and Ahuvia (2002), as they said
there is a mutual correlation of the importance between intrinsic goals
such as self-acceptance, affiliation, community feeling, and physical
fitness and extrinsic goals such as financial success, social recognition and
appealing appearance. There is a conspicuous parallel between the
extrinsic or intrinsic distinction and the respective roles of relative and
absolute income. Hence, for a person who gives high priority to extrinsic
goals, decision utility may be expected to be strongly influenced by
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Journals Review: Microeconomics (PEA6014)

relative-income considerations and adapting aspiration levels. On the

other hand, the experienced utility is such a person depends more
strongly on the satisfaction of intrinsic needs, which is much less sensitive
to relative income.

4.3

Conclusion

Aspiration-level theory is yields much more specific predictions on the

stylised facts of zero or low correlations between income and life
satisfaction at different level of analysis than the intrinsic/ extrinsic-goals
approach so far. At the very least, a clear cut dichotomy between
aspiration-level-approaches in terms of relative happiness and needs
approaches in terms of absolute happiness does not appear to be
appropriate.

5.0

Journal 4: Absolute Income, Relative Income, and Happiness

The fourth selected journal is about Absolute Income, Relative Income,

and Happiness. This journal has been written by Richard Ball and Kateryna
Chernova on 2005. This study uses data from the World Values Survey to
investigate how an individuals self-reported happiness is related to the
level of her income in absolute terms and the level of her income relative
to other people in her country.

5.1

Motivation

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Journals Review: Microeconomics (PEA6014)

This study examines empirical evidence on the relationship between

income and happiness. The specific objective is to compare the
importance of absolute income and relative income in determining
happiness on how much does a persons happiness depend on her income
in absolute terms and how much does her happiness depend on her
income relative to the incomes of others? Researchers also asked to the
extent that happiness does it depend on absolute and / or relative income,
how large is the effect of income on happiness compared to the effects of
non-pecuniary factors such as personal relationships, employment and
health? Although the relationship between money and happiness has been
of perennial interest to philosophers, psychologists and other social
scientists, contemporary interest in this issue among economists can be
traced largely to a seminal paper by Easterlin (1974).
A prominent hypothesis presented in that paper was that people
care exclusively or almost exclusively about their incomes relative to the
national distributions of income in the countries in which they live, and
that, given their relative income levels, people care little or not at all
about their absolute income levels. As Easterlin pointed out, if people care
only about their relative incomes, then a distribution-neutral shift in a
countrys GDP per capita will not make anyone happier. If this is true,
policymakers, donors of foreign aid, and anyone else hoping to improve
the lives of people around the world should look for strategies other than
simply promoting growth.

5.2

Research Design

To answer all the questions in previous part, researchers have conducted a

research on it and its divided into several part of analysis. They are Part A
is qualitative results on control variables, Part B is qualitative results on
absolute and relative income, Part C is quantitative results on absolute

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Journals Review: Microeconomics (PEA6014)

and relative income and Part D is quantitative results on non-monetary

factors.

5.2.1 Part A- Qualitative results : control variables

Even though, this study is focusing on the effects on happiness of

absolute and relative income but it is interesting first for researcher to
comment briefly on the effects of the individual- and country-level
variables included as controls. As overall conclusion on this part as is on
average, the higher is the per-capita income of a persons country, the
happier she is. The result indicates that, whatever an individuals income
might be and however it compares to the incomes of others in the
country, there are aspects of living in higher-income countries that are
conducive to happiness.
Apart from that, researchers also speculated that these are includes
a better infrastructure and public services, greater choice of consumer
goods, and greater opportunities to pursue post-materialist values.
Other than that, on average, the faster a persons country has been
growing, the happier she is. Just as people may evaluate their well-being
in comparison to others, they may also evaluate their well-being in
comparison to themselves in previous periods.

5.2.2 Part B- Qualitative results: absolute and relative income

While in this part, researchers discussed about the effects of absolute
income and relative income on happiness that are the major focus of this
study. In this section researchers examined just the direction of change in
an individuals happiness level when her absolute income increases or her
relative income increases.
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The finding that people are made happier both by increases in their
absolute incomes and by increases in their relative incomes is perhaps
unsurprising. But it is important to state, because previous research has
sometimes asserted or implied that people must care exclusively about
one of these measures of income or the other.
5.2.3 Part C- Quantitative results : absolute and relative income
In this part, researchers had measured the effects of absolute and relative
income by using a ratio of two elasticities. Aside, researchers also
conclude the results from quantitative test for this part as follows. For a
median individual, researchers found that the effect of a marginal change
in relative income on happiness is several times larger than the effect of a
marginal change in absolute income. While, for joint distribution of
absolute and relative income which observed in the sample, the effect on
happiness of a change in relative income is typically larger than the effect
of a change in absolute income. As a conclusion, relative income changes
have a greater effect than absolute income changes.

5.2.4 Part D- Quantitative results : non-monetary factors

Although the focus of this study has been on the importance of absolute
and relative income in determining happiness, researchers said that it is
also important to compare the importance of these income measures to
non-pecuniary factors. Researchers made these comparisons on the basis
of discrete changes in the variables by using identities. The results has
illustrated for the case of a median individual only on the importance of
absolute and relative income compared to three important non-pecuniary
factors including marital status, employment status, and health.
The findings present an important caveat to all the preceding
analysis is this study. Although we have found strong evidence that,
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ceteris paribus, larger absolute incomes and larger relative incomes both
tend to make people happier, and that changes in relative income tend to
have a greater effect on happiness than do changes in absolute income,
the results presented in this section show that the effects on happiness of
several non- pecuniary factors are greater by many orders of magnitude
than the effects of either income measure.

5.3

Conclusion

The main findings are that both absolute and relative income is positively
and significantly correlated with happiness. Quantitatively, changes in
relative income have much larger effects on happiness than do changes in
absolute income, and the effects on happiness of both absolute and
relative income are small when compared to the effects several nonpecuniary factors. The finding that people do care about their absolute
incomes implies that a distribution-neutral increase in average income will
make everyone happier. In that sense, economic growth can increase
human welfare. But the finding that people also care about their relative
incomes adds a note of caution of if some peoples incomes grow more
slowly than others, the relative losers could end up feeling worse off,
despite the increases in their absolute incomes. And any individuals
whose absolute incomes remain constant or fall during a period of general
economic growth lose unambiguously.
Researchers had also found strong evidence that changes in relative
income tend to have larger effects on happiness than do comparable
changes in absolute income. This result suggests that, even in an episode
of economic growth during which everyones absolute income increases,
the welfare losses of relative losers could be large. In terms of aggregate
happiness, any adverse distributional consequences of growth could
swamp the material benefits.

6.0

Overall Conclusion
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As the overall conclusion, utility will be maximizing if there is least of

errors in forecasting the utility as mentioned in the first journal. While, the
utility also can be maximize if the relative and absolute income is increase
as for as it will increase the happiness as mentioned in the third and
fourth journal. However, there is a need of major changes if governments
would like to enhance this utility maximization into a standard policy as
per mentioned in the second journal.
Aside, journal on this topic is very interesting as people could understand
better on how people are maximizing their utility with certain anomalies
as this topic is much closer to our daily routines. I would suggest to all my
friends to read this topic accordingly as its able to enhance our
knowledge about the utility.

REFERENCES

Daniel, K. & Richard, H. K. (2006). Utility Maximization and Experienced

Utility. Journal of Economics Perspective-Volume 20, Number 1- Winter
2006. Page 221-234
Daniel, K. & Robert, S. (2005). Experienced Utility as a Standard of Policy
Evaluation. Environmental & Resources Economics (2005) 32: 161-181

Maarten, V. & Johannes, V. (2003). Experienced versus Decision Utility of

Income: Relative or Absolute Happiness.
Richard, B. & Kateryna, C. (2005). Absolute Income, Relative Income, and
Happiness

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