Illusory Losses

Abstract:     
Recent empirical work demonstrates that people's self-reported happiness is remarkably resilient to many large changes in life conditions; apparently significant adverse events often inflict little or no hedonic damage. One reason for this surprising result is people's power of adaptation. An additional and perhaps more fundamental reason involves attention: Most of the time, people go about their lives without attending to, or focusing on, adverse conditions, and hence those conditions inflict little hedonic harm. If people make hedonic forecasting errors about their own lives, they are highly likely to make such errors when assessing hedonic losses experienced by other people. These findings have important implications for the legal system, especially in the context of awards for pain, suffering, and hedonic losses. A special problem is that if people adapt to adverse changes because they cease to focus on them, the context of litigation will produce a serious distortion, because the attention of juries and judges is specifically focused on adverse changes. But there are two qualifications. First, some losses inflict significant hedonic damage, because people cannot help focusing on them; chronic pain, anxiety, and depression are the most obvious examples. Second, people may suffer capability loss without suffering hedonic loss, and the legal system should award compensation for capability damages.

These claims have broader implications for questions of law and policy, including appropriate priority-setting for governments concerned with the welfare of their citizens. For example, increases in Gross Domestic Product are not correlated with increases in self-reported happiness, in a way that raises serious questions about the focus on GDP; but perhaps GDP growth is connected with social gains that are not captured by self-reported happiness. There are also fundamental questions about the relationships among hedonic consequences, meaning, and the ingredients of a good life. The simplest conclusion is that pervasive existence of hedonic forecasting errors raises the possibility that both economic and regulatory policies are misdirected.

Number of Pages in PDF File: 40

Keywords: happiness, pain and suffering, hedonic damages, relative position, loss aversion, hedonic forecasting errors, legal system, GDP

JEL Classification: H00

working papers series