Tag Archives: Daniel Kahneman

Wantability, Well-Being and Risk

I’ve been mulling a name change for the blog for some time. The name the “The Rational Pessimist” was a riposte to Matt Ridley’s book “The Rational Optimist“. Ridley’s book is a paean to global free markets and human innovation–and in parts is correct. Since the industrial revolution commenced, technology coupled with capitalism has lifted the bulk of the world’s population out of a Hobbesian life that was “nasty, brutish and short”. But where I differ from Ridley is in believing that a 200-year data set of economic growth can fully capture all future risk.

Ridley’s book is Panglossian. He believes that every problem we face–from climate change to resource depletion–is relatively minor, just waiting to be solved by a technological fix. For him, price always trumps scarcity. Whenever something looks like it is running out, the magic of markets will  always lead to new discoveries or acceptable substitutes.

As an economist by training, I accept that the everlasting dance between supply, demand and price is something of beauty. But I also believe that it has its limitations. A backward-looking empirical observation that things haven’t run out is different from a forward-looking theoretical prediction that things won’t ever run out. North Sea oil is running out regardless of price, and a global supply of oil is not qualitatively different from a local one.

Of course, technology may provide a perfect, or dare I say it better, substitute for fossil fuels. But then again it may not. That is uncertainty, and the consequences of that uncertainty is the concept of risk.

Continue reading

Chart of the Day, 31 Jan 2015: Happy Danes, Sad Greeks

The Atlantic has just published a fabulous article entitled “The Danish Don’t Have the Secret to Happiness“.  It is a response to a myriad of charts that look like this (taken from a tongue in cheek article in the British Medical Journal that The Atlantic references):

Life Satisfaction jpeg

Michael Booth, the author of the Atlantic article, is a Danish happiness cynic, questioning the happy state of Denmark on three fronts. He posits that

1. Danish happiness is a false construct arising from low expectations,

2. the boring nature of Danes allows them to remain happy, and

3. their smugness will ultimately lead to the nation’s final demise.

The low expectations argument is a restatement of what the happiness economist Caroline Graham calls the ‘happy peasants and miserable millionaires’ paradox (see, for example, here). According to her, our happiness set point can be a function of our surroundings.

While the research confirms the stable patterns in the determinants of happiness worldwide, it also shows that there is a remarkable human capacity to adapt to both prosperity and adversity. Thus, people in Afghanistan are as happy as Latin Americans – above the world average – and Kenyans are as satisfied with their healthcare as Americans. Crime makes people unhappy, but it matters less to happiness when there is more of it; the same goes for both corruption and obesity. Freedom and democracy make people happy, but they matter less when these goods are less common. The bottom line is that people can adapt to tremendous adversity and retain their natural cheerfulness, while they can also have virtually everything – including good health – and be miserable.

Indeed, an individual’s happiness set point can not only be a function of relative health, wealth, beauty and so on relative to one’s peers but also the same yardsticks measured against one’s past life. So how about the Greeks? Are they adapting to their new straightened circumstances? According to OECD data, the answer must be “no” or at least “not yet”. From the “How’s Life in Greece, May 2014” survey, life satisfaction comes in at around 4.7 out of 10, which puts Greece at the bottom of the OECD (here).

Further, while life satisfaction can be dubbed a function of the remembering self (when I sit down in a chair and think of my life, am I satisfied), people’s happiness as also related to their experiencing self (using the Nobel prize winner Daniel Kahneman’s terminology– see my post here). In short, am I cold, hungry, stressed, anxious , sad and/or in pain; or am I warm, replete, joyful, relaxed, rested and/or content? The OECD reports that only 52% of Greeks report having more positive than negative experiences in an average day (the lowest in the OECD) compared with an average of 76%.

For Greece to live with long-term austerity, Angela Merkel and the Troika must believe that Greek happiness indicators must, in the course of time, reset upwards. Unfortunately, they haven’t been reading the happiness literature in sufficient depth. While life satisfaction can adapt, adaption is generally a reaction to a set of circumstances that you have grown up with. Such forms of satisfaction lack what Graham calls “agency” or “the capacity to pursue a fulfilling and purposeful life”.  And once you have tasted “agency” you don’t want to lose it.

The appeal of Syriza, and its slogan of “hope”, is its potential to restore a degree of agency to the Greek people. Whether they can deliver this agency is a different question. In reality, income and wealth bestow a high degree of agency since they give us the financial wherewithal to make choices. However, agency can still arise from non-financial means, such as having the ability to adopt a non-conventional lifestyle, move from one area to another, change career, better one’s education and gain access to art and culture.  To stop disillusionment setting in, Syriza will have to put much effort into the fostering of such sources of low cost agency.

Happiness can be viewed from other vantage points too. Many scholars of happiness have identified eudaimonia as a source of happiness. This is sometimes described as human flourishing, but I prefer to view it as the sense of participating in and contributing to something greater than one’s own life. Past political movements have tapped into eudaimonia to give their followers a sense of shared propose and even destiny–sometimes, of course, to disastrous effect. However, at its best, it can be a fuel for transformational social movements that enthuse and enrich those advancing the cause as much as the final beneficiaries. Alexis Tsipras has certainly given Greeks a vision of change that could stimulate eudaimonia, but whether this can morph into a philosophy or ideal that has some staying power beyond the post-election honeymoon is a different question.

Meanwhile, for Danes seeking eudaimonia, a temporary move to Greece would not be a bad idea. But remember that the Danes always have the option of returning to Denmark and restocking on more mundane sources of happiness. The Greeks don’t.

On Sustainability and Happiness (Part 2)

In my last post (here), I looked at the mounting evidence that GDP per head is correlated with happiness when tracked for individual countries through time—a finding that goes against the previous orthodoxy that went under the moniker of the Easterlin Paradox (if we all get richer, none of us get happier).

The U.S. and China are sometimes argued as key countries that show no such improvement in happiness, but anti-Easterliners explain away the U.S. by pointing to stagnant median income growth through time (GDP per head has risen, but it has all gone to an elite, so most people haven’t secured any income-induced extra happiness), and view the China findings as irrelevant due to a lack of sufficient data.

The situation is ironic since it is only recently that advocates of the Easterlin Paradox have made headway in transferring their ideas out of academia and into the public domain, so catching the attention of politicians. Here is the economist Andrew Oswald in an Op-Ed in The Financial Times in 2006 (here):

But today there is much statistical and laboratory ­evidence in favour of a heresy: once a country has filled its larders there is no point in that nation becoming richer.

The hippies, the Greens, the road protesters, the downshifters, the slow-food movement – all are having their quiet revenge. Routinely derided, the ideas of these down-to-earth philosophers are being confirmed by new statistical work by psychologists and economists.

Justin Wolfers, the Easterlin Paradox’s great nemesis, would beg to differ. Accordingly to him, GDP per capita has captured human welfare as encapsulated in the idea of self-evaluated happiness quite well. Indeed, he views the happiness literature as maturing to a stage where it aligns well with GDP and, indeed, the old stalwarts of economic analysis ‘utility‘ and its first cousin ‘revealed preference‘—as such happiness has become respectably boring and quite neo-classical economics in tone.

“Utility’ and ‘revealed preference’ are the two trump cards of orthodox economists when confronted by arguments from non-economists that money can’t buy you happiness. Such economists will say “don’t listen to what people say, look at what they do”. And what people frequently do is buy, buy, buy—or work like hell so they are able to buy, buy, buy— to the exclusion of all those things that are supposed to bring happiness like hanging out with the kids, communing with nature, going for a jog, catching up with old school friends and taking up charity work.

Nonetheless, while Wolfers appears to relish his bar fight with Richard Easterlin, he has been very reluctant to take on the titan of behavioural economics, Nobel Laureate in Economics Daniel Kahneman. In Wolfers last major paper on happiness written with his wife Betsey Stevenson, the conclusion purposefully avoided any confrontation with Kahneman:

To be clear, our analysis in this paper has been confined to the sorts of evaluative measures of life satisfaction and happiness that have been the focus of proponents of the (modified) Easterlin hypothesis. In an interesting recent contribution, Kahneman and Deaton (2010) have shown that in the United States, people earning above $75,000 do not appear to enjoy either more positive affect nor less negative affect than those earning just below that. We are intrigued by these findings, although we conclude by noting that they are based on very different measures of well-being, and so they are not necessarily in tension with our results.

This is interesting, because Kahneman says some quite specific things about the use of the word ‘utility’ by economists in his magnum opus “Thinking Fast and Slow”.

As economists and decision theorists apply the term (utility), it means “wantability”—and I have called it decision utility. Expected utility theory, for example, is entirely about the rules of rationality that should govern decision utilities; it has nothing to say about hedonic experiences.

Kahneman goes on to make a distinction between the ‘remembering self’ and the ‘experiencing self’. The latter is concerned with the immediate emotions of joy, love, hate, sadness and so on and is completely distinct from the former’s happiness calculus gleaned from a balancing of a perceived life’s worth.

The book highlights an example of this dichotomy: the contemplative question of whether one’s happiness would increase if one moved to sunny California from the weather-challenged Midwest. The example is played out as a husband and wife spat. The wife believes that all will alter in a move to a sunnier clime, the curmudgeon of a  husband says nothing will change. And on this occasion, the data suggests that Kahneman is right. Weather (and climate) is the wallpaper of our lives: it is something that we will barely give thought to for more than a few minutes per day—and most often we see it as a given in our lives: neither a subtracter of happiness nor an additor.

Here is Kahneman filling out the different concepts of happiness:

So what happens if we start to measure experiential happiness rather than remembered happiness? The former is sometimes divided into positive affect—joy, love, hope, amusement and so on—and negative affect—pain, sadness, hate, regret and so on. What we find out, accordingly to Kahneman, is that the correlation between the remembering self and the experiential self is only 0.5. Events that will maximise self-evaluation of happiness will not necessarily maximise experiences. That is why people choose to take a job with a long commute or work for a bulge bracket investment bank like Goldman Sachs, even though both choices may be very negative in terms of experiential happiness.

In a classic paper with Angus Deaton, Kahneman actually teased out the impact of a rise in income for the remembering self and experiencing self. He came up with this chart (click for larger image) from this seminal 2010 paper (here):

Positive affect, blue affect, stress and life evaluation jpeg

And for those who like numbers, we have this table below from the same paper. What you see is a reasonably high correlation between income and how we perceive our lives (the Cantril ladder of life satisfaction from one to 10) but a very low correlation with positive affect (joyish kind of stuff) and blue affect (sadness kind of stuff).

Life evaluation jpeg

So Justin Wolfers may have felt he had won the war, but has he in fact just won an insignificant battle? More to come on this.

Climate Change: I Didn’t Do It My Way

When new acquaintances learn of my interest in climate change, most try to change the subject; but when they learn that I used to be very active in financial markets, they often become engaged in the conversation and ask  questions on economics or investment. Why should the reaction be so different?

For such people, the logic with respect to financial markets appears to go something like this: “I have no idea if this guy is full of bullshit or not, but he seems to know something about investment so let’s find out what he has to say.” But for global warming I find the following reaction: “I have no idea if this guy is full of bullshit or not, but he seems to know something about climate change so let’s find a way to change the conversation because it is making me feel uncomfortable.”

I have always been fascinated about the psychology behind financial markets, a field of study that was given the economics profession seal of approval when Daniel Kahneman won the Nobel Memorial Prize in Economics in 2002 (for the best business/economics book of 2012 read his Thinking Fast and Slow). Psychology helps explain why individuals, or groups of individuals, frequently act in certain ways that is different from the profit-maximising model underpinning neo-classical economics.

Similarly, my suspicion has been that psychology lies behind the reason why climate change has failed to engage the general public, even though they should be engaged for reasons of self-interest if nothing else.

The other day I stumbled across the blog of George Marshall, the founder of the charity Climate Outreach Information Network (COIN) who has been developing the same line of thinking for far longer than myself. The introduction to his blog contains a question:

This blog explores the topic of the psychology of climate change denial – with observations and anecdotes about our weird and disturbed response to the problem. It seeks to answer a question that has puzzled me for years: why, when the evidence is so strong, and so many agree that this is our greatest problem, are we doing so little about climate change?

I encourage you to go through some of Marshall’s posts. They are not only insightful in trying to understand the apathy, indifference and denial that surrounds climate change but also sympathetic to the soft denialists (the vast majority of the population).

I will just pick up one theme that runs through the blog: narrative. Continue reading