You can’t always get what you want: observations on self-reported satisfaction, consumption, and underlying utility

Publication type

Conference Paper


BHPS-2005 Conference: the 2005 British Household Panel Survey Research Conference, 30 June -2 July 2005, Colchester, UK


Publication date

June 1, 2005


Although social science surveys have long asked respondents to report levels of life
satisfaction or happiness, economists have only begun to use those data in the last ten
years or so. Other social scientists often joke that, rather than simply ask what makes
people happy, economists would rather use data on observed consumption to infer the
shape and arguments in a utility function. The hesitation is founded on an inherent
skepticism on the part of economists about outcomes that cannot be verified through
objective behavior and on the very powerful notion that preferences are revealed
through observed behavior.
In their survey of the growing economics literature that studies happiness, Frey and
Stutzer (2002) suggest that economists can learn much if they would directly study
data on life satisfaction. Among other things, they suggest that measures of life
satisfaction or subjective well-being can proxy for utility. If one accepts these
measures as a proxy for utility then one can then estimate those goods and activities
that directly yield utility. Frey and Stutzer point to numerous possible determinants of
life satisfaction and review the empirical associations that have been identified to date
in the literature. These include consumption, both absolute and relative income and
wealth, social status, unemployment (both individual and aggregate), inflation, and
the democratic institutions and processes in the society in which a person lives. Frey
and Stutzer suggest that studying the determinants of life-satisfaction will yield
implications for economic theory and public policies. It is possible to use measures of
life-satisfaction to shape public policy if one is willing to assume that life-satisfaction
measures can be used to construct a social welfare function. From this leap one can
then examine how social welfare increases or diminishes with policies such as taxes,
income redistribution, levels of inflation, and unemployment.
This logic can be extended to analyze how individual well-being is affected by being
unemployed or by the consumption of various goods. Data from both Britain (Clark
and Oswald 1994) and Germany (Knut and Gesine 1996) suggest that observationally
equivalent individuals suffer lower subjective well-being when they are unemployed
than when they are employed. Others have argued that irrational consumers suffer
lower levels of life-satisfaction when they become addicted to goods such as
cigarettes. The basis for such inferences is an assumption that consumers of addictive
goods fail to make decisions consistently over time and that they suffer self-control
problems. These assumptions form the basis of the model of cigarette addiction of
Gruber and Köszegi (2001). Gruber and Mullainathan (2002) adopt these
assumptions to argue that cigarette excise taxes may make smokers better off. They
use life-satisfaction measures from the General Social Surveys in the United States
and in Canada to show that higher cigarette taxes are associated with higher levels of
self-reported happiness among people who are predicted to be smokers. They argue
that predicted smokers are happier when they face higher taxes because it helps them
abstain from smoking. Gruber and Köszegi (2004) adopt the assumption that these
results are causal to investigate what level of cigarette excise taxes would maximize
social welfare.






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