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The Economics of Happiness A Tool for Measuring Well Being and Public Opinion: A Summary for the IADB Workshop on Quality of Life in Latin America December 8, 2006 Carol Graham Economic Studies Program, The Brookings Institution/ School of Public Policy, The University of Maryland Why Happiness Economics? New method combining tools and methods of economists with those typically used by psychologists Method captures broader elements of welfare than do income data alone Method is uniquely well suited for analyzing questions where revealed preferences do not provide answers, for example the welfare effects of institutional arrangements individuals are powerless to change (like inequality or macroeconomic volatility) and/or behaviors that are driven by norms or by addiction and self control problems (alcohol and drug abuse, smoking, obesity) While economists traditionally have shied away from reliance on surveys (e.g. what people say rather than what they do), there is increasing usage of data on reported well being (happiness): a) consistent patterns in the determinants of well being across large N samples across countries and across time b: econometric innovations help account for error and bias in survey data (AND with the error that exists in all kinds of data!!) Why Not Use Happiness Surveys Biases in the way people answer surveys (question ordering/random events) Adaptation – at individual and country levels a) individual level: some psychologists believe that people ALWAYS adapt to their set point, even after extreme events like divorce or spinal cord injuries; THUS if a poor peasant, who has adapted to his/her condition reports he/she is happy, what can development economists do with this information? b) country level: Easterlin paradox - average happiness levels have not increased as rich countries get richer and make improvements in other areas such as health, education; BUT……………… how long does it take individuals to adapt to these extreme changes?