The Financial Crisis and Pursuing Happiness

Editor’s Note: In a recent episode of Connecticut Public Broadcasting Network’s show “Where We Live,” Carol Graham is interviewed about how the recent financial crisis has affected happiness and general well being. Graham explains how tracking gross national happiness can be one way to measure the health of a nation.

John Dankosky: What can we learn about ourselves through the study of happiness that maybe we can’t learn through things like consumer spending? We’re always talking about consumer confidence in a way, and consumer spending is a way of measuring just how happy and productive we are. What can we tell about people’s happiness, aside from the shopping and buying we do?

Carol Graham: Well, traditional economics relies precisely on, as you mention, consumption choices, individuals’ consumption choices, as an indicator of what makes them well off or better off or what enhances their welfare. If you can imagine, there are a number of areas of human well being that aren’t well reflected by what people consume. That’s for two reasons – one sometimes people’s consumption choices are not necessarily optimal preferences, but the result of addiction or self control problems or particular norms, norms to spend excessively, norms to not invest in health, whatever those may be. So that’s one reason that consumption choices don’t capture all components of human welfare very well. And the second is that there are many times that peoples’ well being is affected by the environmental context in which they live, the institutional context, the macroeconomic context and so forth. And it’s not clear that they can consume to show how those arrangements are affecting them. We use survey research to get at a number of questions, but one set of those questions is the welfare effects of macro and institutional arrangements individuals can’t change. Those could be bad governments, they could be bad environment or good environment, they could be commuting time, all kinds of things. And we can actually measure the effects of those things on human welfare via survey research, surveys of well being.

Dankosky: Your research has shown that recent economic crisis in places like Russia and Argentina has corresponded to drops in reported happiness levels. I wonder if you can talk about that a little bit, as we are in our own economic crisis, maybe not of the level of Argentina a few years ago, but it’s certainly bad.

Graham: I wrote a piece recently, looking at past crises in Russia and Argentina and looking at the magnitude of the falls in happiness. The main point is that people are risk averse and loss averse. So people value income losses disproportionately to gains. Let me say that in real English now. An extra dollar of income does not make people as happy as a loss in a dollar of income makes people unhappy. So losing, or being afraid of losing, income and security has much more negative effects on happiness than do income gains. So crises are, by definition, bad for happiness. And they are bad for two reasons; they are bad because of a levels effect – how much does the average person actually lose in a crisis, and they are also negative because of the insecurity effect. We find, for example, in surveys across the world that fear of unemployment has as much of a negative effect on happiness as does unemployment itself, in most contexts. So the uncertainty effect of the current crisis, I think, is very high. And, I think, that’s because the crisis has affected our fundamental industries, not just the auto industry, but Fannie Mae and Freddie Mac, the banking system, huge industries like AIG. It’s sort of as though the pillars of our system have been rocked. And nobody knows how long it will take to get out of this. Nobody knows how extreme the effects will be. There’s a tremendous amount of, I would say, interconnected psychology as people read more and more about the crisis as the press reports more on the crisis and there is kind of a psychological effect that affects financial markets as well. I think the uncertainty effects in this particular crisis are having probably quite strong effects on a lot people’s well being.

Listen to the entire interview » (Carol Graham’s portion of the interivew begins at minute 42:30.)