Why Income Comparison is Rational
17 Pages Posted: 8 Jan 2009
Date Written: January 7, 2009
Abstract
In many cultures a major factor affecting a person's happiness is the difference between their income and that of their neighbors, independent of their own income. This effect is strongest when the income difference is negative (richer neighbor). In addition, across their lifetime, a person's happiness tends to follow a U shape, with a minimum in the 40's. Previous models have separately explained some of these three phenomena. Some of these models have assumed the person has cognitive limitations, e.g., their happiness has a finite number of possible values, or they cannot accurately assess their happiness. Here I present a model which explains all three of the phenomena, and does not assume any cognitive limitations. In this model moderately greater income of your neighbor is statistical data that, if carefully analyzed, would recommend that you explore for a new income-generating strategy. This explains unhappiness that your neighbor has moderately greater income, as an emotional prod that induces you to explore, exactly as a detailed statistical analysis of the income difference would recommend. This model also explains why unhappiness is not stimulated by a positive income difference: that type of difference does not imply you should explore. In addition, the model explains the U shape of happiness across lifetime as due to the fact that the longer one lives, the more searching over income-generating strategies one has done, and therefore the less relevant new statistical data is. The model also makes numerous predictions that can be tested in future experiments and social surveys.
Keywords: hedonic utility, income comparison, social comparison, exploitation/exploration, computational heuristc
JEL Classification: C10, C13, C44, D81, D83, J20
Suggested Citation: Suggested Citation
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