Economics - General

How happy are you?

This question seems simple, but answering the key factors that impact your happiness is complex. Is happiness based on your personal situation (e.g., family, job, income, health) measured in an absolute sense or relative to others? If measured in a relative sense, what reference point is used?

One approach to measuring your life satisfaction is to use Multiple Discrepancies Theory (MDT), an approach developed in Michalos 1985.

MDT suggests that multiple reference points could be used when evaluating one’s situation, even simultaneously. A person’s satisfaction with the situation is assumed to depend on perceived differences between what one has and seven points of comparison. These are what individuals think they need to survive (self-needs), what individuals think they are entitled to (self-deserve), what they would like to have (self-wants), what people in their immediate environment have (self-others), what individuals ever had before (self-past), what they had expected to have now three years ago (self-progress), and what they expect to have five years from now (self-future).

Certainly some previous research has examined absolute versus relative differences but the time component of MDT is interesting. There is some evidence that the timing of well-being may make a difference. Consider the case of the impact of changes in income on happiness.

Easterlin et al. (2010) found that short-term happiness and income move in the same direction (e.g. downwards in a financial crisis). Nonetheless, in the long run (i.e., about 10 years), SWB does not increase together with the absolute income over time. One possible explanation for this paradoxical finding is that individuals compare their income to that of others and themselves in the past…

A recent study by Neumann-Böhme et al. (2021) aims to identify if these reference points make a difference and how differences in income and health affect life satisfaction. They surveyed over 500 people in the Netherlands examining the relationship between income, health (measured using EQ-5D) and life satisfaction (measured using the Satisfaction with Life Scale (SWLS)). Based on this approach, they found:

.Our results suggest that in our sample, multiple reference points were associated with life satisfaction. We found significant negative effects on life satisfaction measured by the SWLS when there were discrepancies between the current income and the perceived self-need or self-progress. An upward comparison, meaning that the current income was rated worse than what respondents think they need or expected to have, was associated with lower satisfaction…Similarly, we found that relative income (i.e. actual income compared to self-stated subsistence and luxury incomes) was significantly associated with SWB throughout all models. In contrast, the comparison to the basic budget line, which could be seen as an external relative income category, was not significantly associated with SWB. Furthermore, the basic budget line values, relevant in Dutch policy, were substantially below what respondents believed to be a subsistence income. For example, median subsistence household income for couples with no children was € 2250 as indicated by themselves, while, in contrast, the basic budget for this household would be € 1330…

In the health domain, being in a health state that was perceived as worse than what respondents thought they deserved was highly significantly and negatively associated with life satisfaction measured by the SWLS

The findings are interesting in that not only does life satisfaction depend on health and income, but these quantities are valued relative to multiple internal, external and temporal reference points.


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