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Why Income Comparison is Rational

17 Pages Posted: 8 Jan 2009  

David Wolpert

Santa Fe Institute

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

Wolpert, David, Why Income Comparison is Rational (January 7, 2009). Available at SSRN: https://ssrn.com/abstract=1324270 or http://dx.doi.org/10.2139/ssrn.1324270

David Wolpert (Contact Author)

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 897501
United States

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