Sensitivity to prosperity and adversity: What would a Smithian function of happiness look like?

Like many authors of his time, Smith assumes a greater sensitivity to adverse than to prosperous events. Though neglected by commentators, with the exception of Ashraf et al . (2005), the influence that he attaches to prosperity and adversity on happiness deserves special attention, particularly from an analytical point of view. This paper aims at bringing out the implications of such an asymmetry for his work and for current developments concerning decision and welfare. Since the argument that comes to justify this asymmetry, in the Theory of Moral sentiments , is not clear, both in its structure and in its content, the first step consists in a clarification of Smith's position resting, principally, on the History of Astronomy , which introduces the concepts of ‘custom’ and ‘surprise’. Next, Smith's argument is discussed in a more formal framework, through alternative approaches of what might be considered a Smithian happiness function: reference-dependent models with loss aversion or standard cardinal utility-like functions. Textual evidences leads to favour the last alternative. This also leads to non-trivial conclusions concerning the way Smith views individual happiness.