Thursday, March 26, 2009

Seconds Out!: Easterlin Paradox Debate Next Round

We talked a lot about the Stevenson and Wolfers paper that showed a strong relationship between income and happiness even at high levels of income, casting into doubt the Easterlin hypothesis. A new paper by Easterlin and Angelescu argues that the Easterlin view is still alive and well, in the sense that long-run time series changes in income do not lead to long-run time series changes in well-being.

Students in my Economics/Psychology class will relate to the line below.

Put simply, the argument is that people adapt hedonically to an increase in income from a given initial level, their aspirations tending to rise commensurately with income. But aspirations are much less flexible downward. Once people have attained a given level of income, they cling to this reference point -- the well-known “endowment effect” (Kahneman, Knetsch, and Thaler 1991). Hence, if income falls they feel deprived, and their subjective well-being declines. In turn, a recovery in income that returns them toward the reference level increases subjective well- being. Readers will note that the kink in the broken line at point 1 of Figure 2 is analogous to that in diagrams of loss aversion (Kahneman, Knetsch, and Thaler, p. 200)

We will do a journal club here in the next couple of weeks contrasting the Stevenson/Wolfers paper with the current paper.

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