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Behavioral Economics, Happiness Surveys, and Public Policy1

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  • Adler, Matthew D.

Abstract

Two important developments in recent policy analysis are behavioral economics and subjective-well-being (SWB) surveys. What is the connection between them? Some have suggested that behavioral economics strengthens the case for SWB surveys as a central policy tool, e.g., in the form of SWB-based cost-benefit analysis. This article reaches a different conclusion. Behavioral economics shows that individuals in their day-to-day, “System 1” behavior are not expected utility (EU-) rational – that they often fail to comply with the norms of rationality set forth by EU theory. Consider now that the standard preference-based view of individual well-being looks to individuals’ rational preferences. If the findings of behavioral economics are correct, an individual’s answer to a question such as “How satisfied are you with your life?” is not going to tell us much about her rational (EU-compliant) preferences. Behavioral economics, by highlighting widespread failures of EU rationality, might actually argue for an objective-good (non-preference-based) view of well-being. However (except in the limiting case of an objective-good view positing a single mentalistic good, happiness), SWB surveys will not be strong evidence of well-being in the objective-good sense. In short, SWB surveys are no “magic cure” for the genuine difficulties in inferring rational preferences and measuring well-being underscored by behavioral economics.

Suggested Citation

  • Adler, Matthew D., 2016. "Behavioral Economics, Happiness Surveys, and Public Policy1," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 7(1), pages 196-219, April.
    • Handle: RePEc:cup:jbcoan:v:7:y:2016:i:01:p:196-219_00
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    Cited by:

    1. Helen G. Levy & Edward C. Norton & Jeffrey A. Smith, 2018. "Tobacco Regulation and Cost-Benefit Analysis: How Should We Value Foregone Consumer Surplus?," American Journal of Health Economics, University of Chicago Press, vol. 4(1), pages 1-25, Winter.
    2. Kip Viscusi, W. & Gayer, Ted, 2016. "Rational Benefit Assessment for an Irrational World: Toward a Behavioral Transfer Test1," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 7(1), pages 69-91, April.

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