Saturday, December 27, 2008

Misery Loves Company: Recession Edition

Justin Wolfers recently reported poll data that shows the current recession is taking a steep toll on self-reported measures of well being. His posting confirms what other related studies indicate will happen over this recession: happiness will see a marked decline. But wait, Sonja Lyubomirsky writing in the NY Times tells us that happiness has not declined as much as it could and, as a result, we are still relatively happy. (ht Mark Thoma) Why? Lyubomirsky says it is because relative rather than absolute economic status that matters:
Research in psychology and economics suggests that when only your salary is cut, or when only you make a foolish investment, or when only you lose your job, you become considerably less satisfied with your life. But when everyone from autoworkers to Wall Street financiers becomes worse off, your life satisfaction remains pretty much the same.

Indeed, humans are remarkably attuned to relative position and status. As the economists David Hemenway and Sara Solnick demonstrated in a study at Harvard, many people would prefer to receive an annual salary of $50,000 when others are making $25,000 than to earn $100,000 a year when others are making $200,000.

Similarly, Daniel Zizzo and Andrew Oswald, economists in Britain, conducted a study that showed that people would give up money if doing so would cause someone else to give up a slightly larger sum. That is, we will make ourselves poorer in order to make someone else poorer, too.

Findings like these reveal an all-too-human truth. We care more about social comparison, status and rank than about the absolute value of our bank accounts or reputations.


So in a world in which just about all of us have seen our retirement savings and home values plummet, it’s no wonder that we all feel surprisingly O.K.
So while we are not happy as we were at the peak of the housing boom, we are not as miserable as we should be giving our absolute economic condition. While this interpretations seems plausible to me, I assume it only applies within certain bounds. (e.g. Would most people really prefer dire poverty for everyone just to eliminate a some variance in the standard of living?) For now, though, it provides a silver lining amidst the economic distress.

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