The Fatal Human Flaw That Keeps Us From An Economy Based On Happiness

The Fatal Human Flaw That Keeps Us From An Economy Based On Happiness

In theory, happiness is a better indicator of prosperity in a country than traditional economic measurements. But human psychology has a tendency to get in the way. Measuring and comparing the overall happiness of societies has become a pop discipline that we’ve covered more than a few times (see here and here). Bhutan, with its “gross national happiness” indicator, helped kicked off the trend. But what if a country like Costa Rica (number six on this list of the world’s happiest countries) suddenly got competitive and wanted to raise its overall happiness? You’d think it would make sense for the government to start implementing policies–whether in education, taxes, or crime–that maximize the total happiness in society. What portion of ‘happiness’ can be attributed to living in the smog of Los Angeles versus the pristine air of Honolulu? In fact, this is exactly what a growing number of “happiness” economists think about. Traditionally, economists assist policymakers in deciding how to make tough policy tradeoffs by trying to put a monetary value on people’s preferences: how much taxpayer money they should spend to, say, make the air a bit cleaner or the crime rate lower. Happiness economists are taking a slightly different approach. They ask a large number of people about their overall happiness, and by comparing the answers, tease out what portion of “happiness” can be attributed to living in the smog of Los Angeles versus the pristine air of Honolulu versus, say, getting a lower tax rate or a raise at work. The tactic can be used to help answer policy questions like: How much parkland should a city provide? Or, is it worth investing public resources in sports teams? Do the benefits of increased police patrols outweigh the costs? One of the first studies to use this kind of happiness analysis found that, for people living near an airport in Amsterdam, a 50% increase in noise reduces well-being by “as much as a 2.2% drop in income.” If you ask people about their long-term outlook on life on sunny days, you’ll get happier answers. A new paper by Georgetown University economist Arik Levinson points out some major problems with using “happiness” as a way to answer these questions. The two biggest are the flip side of the same coin, and have to do with underlying aspects of human psychology:1) For better or worse, people adjust to their circumstances

People who win the lottery might be happier initially, but after a certain amount of time (a year, say) are no happier than they were before. Conversely, people who suffer debilitating injuries may initially be less happy, but after a few years have completely adapted to their new reality.

2) People aren’t rational and tend project momentary circumstances onto long-term decisions 

If you have a full belly when when you go food shopping, you might not buy as many groceries as you need for the week. If you ask people about their long-term outlook on life on sunny days, you’ll get happier answers. Levinson demonstrated the combination of these two effects by showing that the current day’s air quality affects how people rate their happiness, but the local annual average air quality does not. Essentially, our perceived happiness does not react well to long-term changes (i.e. changes brought by public policies, usually) and overreacts to temporary changes. “If we clean up the air, this says people are no happier as a consequence,” explains Levinson, even though we know, objectively, that they are better off, he says. “That casts a lot of doubt, to me, on the use of happiness in public policy.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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