Wednesday, October 27, 2010

Dublin Man Collects 16.4million euro winning

RTE reports on the Dublin winner of Saturday's 16 million euro lottery jackpot. Will it make him more happy? Everything in the fiber of my being tells me that I would be happier for a long time if I suddenly had an extra sixteen million euro. But the literature really doesn't back this up in a general sense. I am sure we would get a lot of volunteers if we set out to do a randomised trial on this effect. The most famous paper on this area is from 1978 and showed that people who won the lottery and people who were rendered paraplegic by an accident initially experienced big changes in well-being in the expected direction and then converged back to their base levels. This is in line with a big literature arguing that well-being is set to a fixed point determined by genetics, upbringing, disposition etc., and that it is not very malleable to changes in external factors like income. People like Kahneman and others have argued that the focusing illusion effect might come into play when we think of what life would be like after some external change. For example, the linked paper shows that people think they would be happier if they lived in California (nice weather etc.,) but, in fact, Californian's are no happier than New Yorkers (same working stresses etc.,). We think it would be nicer to live in California because we focus on the nice weather. A more recent paper asks the question "would you be happier if you were richer?" again arguing that people overfocus on the benefits of money when making counterfactual judgments. People like Daniel Gilbert have talked about affective misforecasting where we mispredict how good or bad we will feel consequent on life changes, in particular that we will overestimate how long we will have a change in well-being consequent on a change in circumstances (see a TED Talk here). Mark linked to a recent paper by Kahneman and Deaton using the global Gallup data, showing that income has a much bigger effect on life satisfaction than emotional well-being. So in other words, if we ask the man in a year's time how satisfied he is with his life, we might expect him to be more satisfied but if we look at how he feels on a day-to-day basis then we might not see much change. Of course, most of the papers in the literature deal with levels of income rather than sudden once-off increases in income. It might be the case that the exertions that a helicopter drop of money place on the self-control of the winners may reduce well-being effects, particularly if the people have no experience of managing the various complexities both social and financial that accompany their new-found wealth.

One thing that should certainly be explored is whether rollover jackpots should be split using some mechanism. For example, why not 16 prizes of one million? One for another post.


Kevin Denny said...

Or why not one million prizes of €16.01 ? Since the expected return would be higher. But I bet a lot fewer people would pay.

Mark McGovern said...

No-one seems willing to take this literature to its natural conclusion yet, perhaps because it leads to some uncomfortable (for some) recommendations about what should be done with taxation policy (see above post by Kevin), the role of economic growth etc. Taking all of the established phenomena together (the importance of relative income, focusing illusions, hedonic treadmills) it’s pretty clear these studies are highly suggestive that the current distribution of income is sub-optimal. From the point of view of maximising total happiness in society that is, and you need to believe these self assessed questions are good measures of this, which I’m not fully convinced of.

Given the large (relative to income) adverse effects that have been found for unemployment in the literature, the words “jobless recovery” should be particularly disheartening.

There is another issue, prospect theory. We know that people are risk averse, so trying to implement any kind of redistributive policy needs to be framed carefully. See “Benchmarking” and the debate on cutting public sector pay.

Liam Delaney said...

A good few people have made this argument over the centuries Mark. I think it is true that redistributing income would be optimal if marginal utility were the only consideration. But the obvious and oft-made counterarguments are firstly how do you achieve such a distribution of income efficiently and secondly why can we assume that the state has the right to do this in the fashion you outline. If you take equalising marginal utilities of income to an extreme you end up in some strange places too.

@kevin - dat would be an empirical matter. I have a good few thoughts on this. Framing is clearly the issue here as even with 16 separate prizes the odds are tiny, and if you want 16 chances, you could always buy sixteen tickets. I guess my rationale for having sixteen prizes would be that I don't think people can process the benefit of a lump-sum windfall beyond a million euro. I think the happiness you feel at winning a million is the same as the happiness you feel at winning sixteen provided you are not already wealthy and most of the people who do the lotto are not. The utilitarian in me feels it would be making sixteen people happy rather than one.