D Murali

Valuation of happiness

D. MURALI | Updated on August 30, 2011


A key question that inspires Nick Powdthavee to write The Happiness Equation: The surprising economics of our most valuable asset ( www.landmarkonthenet.com) is if there could be a scientific way to construct a happiness formula. What if we can actually put a value or a price on each different life event so that we know which is more worth our time, relative to the others, he wonders, before exploring the possibility of having perfect foresight about our emotional reactions to the many different events that happen in our lives. During the ‘happiness' safari through the woods of research in multiple disciplines, Nick introduces us to Richard McKelvey and William Zavoina, whose paper (1975) adopted ordinal comparability of self-reported happiness.

Their model, as Nick instructs, could help one find out, for example, what the average probability of a married person being ‘very happy with life' is, compared to someone who is single, all else being equal. “This — perhaps unexpectedly — proved to be a major methodological breakthrough for a minority of economists who were interested in subjective well-being data.”


Chapter 3, titled ‘Money can't buy me love, but can it buy me happiness,' highlights what traditional economic textbooks do not tell you — that there are two main motivations for the demand for money. “The first is for pure consumption: we demand money for its unique function as a medium of exchange for all the goods and services we need to survive adequately. The second — and lesser-known one — is that we demand money for the status that it brings.”

Explains Nick that once we go beyond a certain level of income, it becomes natural for most of us to start caring a lot more regarding what other people think of us, and if others know how much money we have deposited in our bank account compared to their bank account. He underlines also the apparent irrationality that our happiness is not only a function of our own income but also of other people's incomes. Apt, in this context, is the quote of John Stuart Mill, cited in the book: “Men do not desire to be rich, but richer than other men.” There have been studies on happiness at the workplace, which show that there can indeed be a negative effect of other people's incomes on our self-reported job satisfaction (Andrew Oswald and Andrew Clark). The two Andrews found that the well-being effect of our own income and other people's incomes are equal and opposite. “In other words, receiving a pay rise at work will certainly make me a happier worker. But if other people are getting exactly the same pay rise as I do — well, all of us might as well receive no rise at all.”


A section titled ‘Putting price tags on everything' traces the work of Oswald. The idea is simple, he tells Nick. “Say I'm assessing, on a scale of 1 to 10, how happy I feel. Perhaps I give an answer of 7. Then, let's imagine I'm given $10,000 out of the blue — may be from an unexpected pay rise — and next time I'm observed in happiness surveys to give the answer of 8…”

According to Oswald, one individual alone does not provide much that is useful, partly because he or she may be going through a lot of events in life, or simply changing mood, in ways the investigator cannot easily understand. “However, if we average across individuals, it's possible to learn a great deal about the forces that bear on human happiness.”

A practical implication of the method, in Nick's view, is that researchers can calculate the monetary values of non-marketable goods (or bads) — life experiences that cannot be bought or sold in the marketplace, such as friendship, good health, or even death — in a straightforward manner. And even if one might argue there is no real need for the shadow prices for these life events to be calculated, simply because there are no markets where these goods are purchasable, their estimated monetary values still tell us a great deal about the relative importance of all these things to an average person, he reasons.

One other implication mentioned in the book is the possibility to calculate compensations, rather than award financial settlements to victims in tort cases, that are in practice so small that their intellectual basis is perplexing. A case in point is ‘West and Son vs Shephard (1964)' in the UK, where the claimant was a married woman who was 41 when severely injured. “She was left paralysed in all limbs and unable to speak. A lump-sum award of £17,500 (approximately $26,250) for loss of amenity (over and above a settlement for harm to her earnings) was upheld by the House of Lords.” Nick finds it implausible that people would contentedly accept complete paralysis in return for a tiny pay rise. So, why not measure the true ‘hedonic damages' — damages awarded to the plaintiff for the loss of joy of living — for these bad occurrences in life if we can, he demands.


To those who suspect if social relationships may impact happiness, the findings of a study of ten-year British Household Panel Survey data has answers, through the best line fit with a slope of approximately 0.0007. What this means is that a £1,000 increase in income on average has a corresponding increase in life satisfaction or happiness) of 0.0007 (out of 7 life-satisfaction points), interprets Nick.

He reports that newly-wedded people score 0.134 life-satisfaction points higher than when they were singletons; people who start seeing friends and relatives almost every day of the week for a year get 0.161 life-satisfaction points higher than when they hardly saw their friends and relatives at all; and people who talk to their neighbours almost every day show 0.083 points higher.After some number-crunching, Nick lays out, for instance, that talking to neighbours every day is worth almost £1,20,000 in the first year in terms of the happiness. Towards the conclusion of the book, after having trawled mounds of ‘happiness' research, the author goes to his grandmother in Thailand to tell her what he does for a living. “I told her that money makes people happy, but often not as much as we think. I told her that people habituate to good things, but also adapt to adverse events in their lives. I even told her one of the most advanced findings to date in the happiness literature: that we tend to exaggerate the importance of anything while we're thinking about it.” The 90-year-old grandmother smiled, leaned closer to Nick and whispered to him: “Tell me something I don't already know.”

For, it is the tale of the Buddha that she was anchored to. “The Buddha said, do not dwell in the past; do not dream of the future; concentrate the mind on the present moment.The nature of this life is impermanent, and the more we cling on to anything that makes us happy, the unhappier we will be in the future. The mind is everything. What you think, you become.” The book, therefore, wraps up by acknowledging that the Buddha had revealed the secret happiness formula, over 2,500 years ago. That Happiness is nothing more than a state of mind, and one that we can train, given effort and time.

For an introspective read, if peace is on your priority list of high-value goals.

Published on August 18, 2011

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