1. Hedonic AdaptationWhy we don’t stay happier Dr. Russell James III Texas Tech University

2. Our choices and our satisfaction are driven by the comparisons we make Nearby additional Alternative Future Past Expected Current Multiple Alternative Relevant Observed

3. Behavioral Economics Concepts Loss Aversion; Endowment Effect; Status Quo Bias Availability Effects Endogenous Determination of Time Preference Nearby additional Alternative Future Past Expected Current Hedonic Adaptation Placebo Effect; Stereotypes Multiple Alternative Anchoring; Paradox of Choice Peer Effects; Relative Standing Relevant Observed

4. Hedonic adaptation Changes in income or experiences temporarily affect happiness, but as people become accustomed to the new situation, the impact diminishes

5. Hedonic adaptation in marriage Daniel Kahneman(Princeton) and Alan B. Krueger (Princeton), 2006, Developments in the measurement of subjective well-being. Journal of Economic Perspectives, 20(1), 3-24.

6. Hedonic adaptation in widowhood Males Females A. Clark (Paris School of Economics), E. Diener (U. of Illinois) , Y. Georgellis (Brunel U.), R. Lucas (Michigan State U.), 2008, Lags And Leads in Life Satisfaction: a Test of the Baseline Hypothesis. The Economic Journal, 118, F222-F243

7. Hedonic adaptation in divorce R. Lucas (Michigan State U.), 2005, Time Does Not Heal All Wounds: A Longitudinal Study of Reaction and Adaptation to Divorce. Psychological Science, 16, 945-950

8. Hedonic adaptation in being fired R. Di Tella (Harvard), J. Haisken-DeNew & R. MacCulloch (Imperial College London), 2007, Happiness adaptation to income and to status in an individual panel. National Bureau of Economic Research Working Paper, no. 13159.

9. Hedonic adaptation in disability Paraplegic / quadriplegic injury victims an average of 20 years after injury tested on (1) Index of Psychological Weil-Being, (2) Life Satisfaction Index, and (3) Center for Epidemiologic Studies Depression Scale. For all three outcome measures, respondents reported levels of well-being only slightly lower than population means of nondisabled persons of similar age. R. Schulz (U. Pittsburgh) & S. Decker (U. Portland), 1985, Long-term adjustment to physical disability: the role of social support, perceived control, and self-blame. Journal of Personality and Social Psychology, 48(5), 1162-1172

10. R. Schulz (U. Pittsburgh) & S. Decker (U. Portland), 1985, Long-term adjustment to physical disability: the role of social support, perceived control, and self-blame. Journal of Personality and Social Psychology, 48(5), 1162-1172

11. In a longitudinal study of a 215,000 person-years, for people who become disabled, “we estimate the degree of hedonic adaptation at – depending on the severity of the disability – approximately 30% to 50%” Estimate may be lower due to progressive diseases. Why? A. Oswald (U. of Warwick, UK) & N. Powdthavee (U. of London, UK), 2008, Does happiness adapt? A longitudinal study of disability with implications for economists and judges. Journal of Public Economics, 92, 1061-1077.

12. Adaptation takes time “There is less evidence of adaptation to chronic or progressive diseases…in contrast to paralysis victims, whose condition is likely to remain constant over time, sufferers of such debilitating diseases must cope … with new impairments as their disease progresses” S. Frederick (MIT) and G. Loewenstein (Carnegie Mellon), 1999, “Hedonic adaptation,” in Well-being: The foundations of hedonic psychology. D. Kahneman & E. Diener eds. NY, NY: Russell Sage Foundation, pp. 302-29.

13. Hedonic adaptation in wealth Happiness level of lottery winners interviewed a few months after winning was not significantly different from non-winners Brickman, P., Coates, D., & Janoff-Bulman, R. (1978). Lottery winners and accident victims: Is happiness relative? Journal of Personality and Social Psychology, 36(8), 917–927.

14. Greater past consumption leads to higher norms causing satisfaction to return to previous levels. The hedonic treadmill

15. Adaptation and relative standing may prevent overall increases in income from creating overall increases in satisfaction Your Previous Income Your Happiness at Income X Your Comparison Group Income Economic research “show[s] that happiness is indeed negatively related to others’ incomes and to own past income.” A. Clark (Paris School of Economics), P. Frijters (Queensland U.), & M. Shields (U. of Melbourne), 2008, Relative income, happiness, and utility: An explanation for the Easterlin paradox and other puzzles. Journal of Economic Literature, 46, 95–144

16. Effect of a 50% spike in income R. Di Tella (Harvard), J. Haisken-DeNew & R. MacCulloch (Imperial College London), 2007, Happiness adaptation to income and to status in an individual panel. National Bureau of Economic Research Working Paper, no. 13159.

17. Positive addictionsA way off the hedonic treadmill? A positive addiction gradually increases satisfaction from consumption and may generate future benefits. This accumulated experience resulting in greater enjoyment is called “consumption capital”.

18. Daniel Mochon (MIT), Michael Norton (Harvard), and Dan Ariely (Duke) studied two positive addictions that have been most strongly associated with subjective well-being: exercise and religious attendance. D. Mochon (MIT), M. Norton (Harvard), D. Ariely (Duke), 2008, Getting off the hedonic treadmill, one step at a time: The impact of regular religious practice and exercise on well-being. Journal of Economic Psychology, 29, 632-642.

19. Immediate impact: Well-being before and after exercise

20. Cumulative impactWell-being and accumulated exercise “for each extra time they had attended their gym or yoga class in the previous month, participants experienced an increase in their well-being of about a third of a point.” D. Mochon (MIT), M. Norton (Harvard), D. Ariely (Duke), 2008, Getting off the hedonic treadmill, one step at a time: The impact of regular religious practice and exercise on well-being. Journal of Economic Psychology, 29, 632-642, p.640.

21. 2,095 surveyed before and after religious service (different people to prevent participants reporting increased mood by remembering earlier response). D. Mochon (MIT), M. Norton (Harvard), D. Ariely (Duke), 2008, Getting off the hedonic treadmill, one step at a time: The impact of regular religious practice and exercise on well-being. Journal of Economic Psychology, 29, 632-642, p.640.

22. Immediate impact: Well being before and after attendance

23. Cumulative impact: well-being and accumulated attendance

24. “Our findings imply that, in contrast to the notion of an inescapable hedonic treadmill, it is not pointless for people to seek to improve their well-being…, it seems like the key for long lasting changes to wellbeing is to engage in activities that provide small and frequent boosts, which in the long run will lead to improved well-being, one small step at a time.” D. Mochon (MIT), M. Norton (Harvard), D. Ariely (Duke), 2008, Getting off the hedonic treadmill, one step at a time: The impact of regular religious practice and exercise on well-being. Journal of Economic Psychology, 29, 632-642, p.640.

25. Hedonic adaptation and prospect theory Sensitivity to the perception of gains or losses, rather than the absolute level of outcomes, reflects the importance of one’s current state in valuing outcomes.

26. Gains, losses, and adaptation The difference between a 7-ft cell and a 9-ft cell is insignificant when one has just lost freedom, but very important after adapting to the new level.

27. Prisoner after adapting to incarceration Utility New prisoner New Hedonic Norm: 7ft Cell Large difference in utility after adaptation 9 ft. Cell 7 ft. Cell Freedom Original Hedonic Norm: Freedom Small difference in utility between two large losses S. Frederick (MIT) and G. Loewenstein (Carnegie Mellon), 1999, “Hedonic adaptation,” in Well-being: The foundations of hedonic psychology. D. Kahneman & E. Diener eds. NY, NY: Russell Sage Foundation, pp. 302-29.

28. Summary Changes in income or experiences temporarily affect happiness, but as people become accustomed to the new situation, the impact diminishes. However, hedonic adaptation takes time and may not offset ongoing improvements (e.g., positive addictions) or declines (e.g., progressive diseases)

29. Slides by: Russell James III, J.D., Ph.D., CFP® Associate Professor Division of Personal Financial Planning Texas Tech University russell.james@ttu.edu Please use these slides! If you think you might use anything here in a classroom, please CLICK HEREto let me know. Thanks! The outline for this behavioral economics series is at http://www.slideshare.net/rnja8c/outline-for-behavioral-economics-course-component