Adaptation to Income and to Status in an Individual Panel Rafael Di Tella, John Haisken De New and Robert MacCulloch

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Adaptation to Income and to Status in an
Individual PanelRafael Di Tella, John Haisken
De New and Robert MacCulloch
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QUESTION Does Peoples Happiness Adapt to
Changed Circumstances?
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• One explanation for the Easterlin paradox is
  the hypothesis that people only care about
  relative position
• A 2nd explanation is adaptation to income occurs
  over time Then the cross sectional evidence can
  be explained by relative position effects to
  which individuals do not adapt
• In this spirit, Easterlin (2003) argues that a
  better theory of well-being
  involves adaptation to income
  but not to events in the non-pecuniary
  domain

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• Examples of Prior Studies in Psychology
• 1. Adaptation to income
• A classic paper argued that a small sample of
  people who had won between 50,000 and 1,000,000
  at the lottery the previous year reported
  comparable life satisfaction levels as those
  that had not.
• Brickman, Coates Janoff-Bullman,
  Journal of Personality and Social Psychology, 1978

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• 2. Adaptation to non-pecuniary events
• It is argued that palm pilot measures of
  momentary mood fail to find evidence that
  hemodialysis patients are less happy than healthy
  non-patients are, suggesting they have largely,
  if not completely, adapted to their condition
  that healthy people fail to anticipate hedonic
  adaptation to poor health
• Riis, Baron, Lowenstein Jepson,
  Journal of Experimental Psychology, 2005

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• As for Australias Richest Man
• JAMES PACKER (interview) he had .. a list of
  ailments. Dad has always been a really physical
  person his loves in life involved, in many
  cases, physicality in some way, shape or form
  for dad to be confined with dialysis unable
  to do things was not a life, not an existence
  that he saw as a life.
• Channel Nine Network News

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• The narrow purpose of the present paper is to
  test for happiness adaptation to status relative
  to income.
• We focus on the Treiman Standard International
  Occupation Prestige Score, a measure of the
  status attached to each job depending on the
  skills it requires that has the advantage of
  having been designed by researchers in another
  context

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Determinants of Happiness 3,818 Germans
1985-00 Adaptation to Income Status
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Average Happiness Response of 3,818 Individuals
who experience a Fifty Percent Rise in their
Income in Yr 0 (from the German Socio-Economic
Panel)

• Happiness

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• FIRST MAIN FINDING
• We cannot reject the null hypothesis that people
  adapt totally to income within three to four
  years.
• Of the initial impact of income, 60.4 of the
  happiness effect is lost over the ensuing four
  years
• (Note The evidence also supports adaptation to
  higher levels of GDP over time
  using country panels)

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Average Happiness Response of 3,764 Individuals
who experience a Fifty Percent Rise in their
Status in Yr 0 (from the German Socio-Economic
Panel)
Happiness
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• SECOND MAIN FINDING
• Significant effects of status are found to remain
  after four years (from the time of the initial
  shock).
• The initial impact of getting more status appears
  to grow over the ensuing years after the shock
  by 28

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• The evidence suggests there is adaptation to
  income but not to status - the pattern required
  to explain the Easterlin paradox.
• In the short-run (1st yr) one s ? status ?
  same ? happiness as an ? of 0.5s income
  
• In the long-run (gt 4 yrs) one s ? status ?
  same ? happiness as an ? of 3.3s in income