Alois Stutzer's paper 'The role of income aspirations in individual happiness' forms the basis for my commentary today.  Stutzer's research  provides a few specific messages:

1. People experience lower subjective well-being when they have higher income aspirations, controlling for their income level. 
   
2. People adapt to their income levels and adjust their aspirations upwards according to their new, higher levels of income.
   
3. The average income of an individual's community affects that individuals aspirations contingent on them interacting with their community, say by visiting neighbours.
   
4. Controlling for endogeneity and for time, a gap between aspirations and reality has a negative correlation with reported subjective well-being.
   

Now, let me try to interpret. Stutzer's main hypothesis is that individuals do not obey utility functions of the type I mentioned in the last post, instead they obtain utility, and thus well-being, through relative assessments of their income, of their position in society.  This draws on a long history in economics from Marx (1849), to Veblen (1899), to Duesenberry (1949) to Frank (1985): their basic message is that aspirations tend to be above the current level.  Wealthy people therefore impose a negative externality on poor people (because the poor aspire to riches), but not the converse (the rich do not aspire to poverty). 

On adaptation, the idea progresses as follows: individuals achieve a certain level of utility become accustomed to it (adapt) and aspirations kick in making them relatively less happy with their position than they were when they first obtained it.  When the gap between aspirations and reality widens, people become less happy (or more unhappy). 

Stetzer's research involves panel data on Swiss households from 1997, 1999 and 2000.  Because he has panel data (i.e. repeated cross-sections with the same households) he can get rid of confounds, such as whether income is constant over time, or whether individual or household reported levels of wellbeing remain constant over time. The survey respondents were also asked what level of income they thought would be good or bad in their circumstances, as well as the monthly income they would require to maintain a standard of living where their needs were reduced and they did not run into debt.  These variables were used to measure understandings of context and aspiration, i.e. the extent to which living in a specific community at a given level of income affected the reported incomes for these questions of 'good', 'bad', and 'sufficient'.

First, couples are, as elsewhere, happier on average than singles.  Couples with young children or grown children or also happier than their single counterparts.  Second, happiness seems U-shaped in age: the general rule is that subjective wellbeing is at its lowest ebb somewhere in your 40s, but then it increases again. Third, foreigners, people with poor health, and the unemployed are substantially less happy on average.  Fourth, household income has an unambiguous positive effect on happiness, but aspirations counteract this positive effect.  What this means is that if people did not have such crazy aspirations, they would be quite happy with the level that they had already obtained.  The pattern of aspire, obtain, adapt, aspire continues.  Let me quote from the article at this juncture:

People experience lower wellbeing when they have higher income aspirations, given their income level. A doubling of the aspiration level, measured by the income that is evaluated as 'sufficient', reduces reported life satisfaction on average by o.266 points. (Stetzer, 2004, 96)

This is a substantial effect, if you consider that there are only ten points on the satisfaction index. 

When looking at the effects on aspirations several factors affect whether aspirations increase or decrease.  Couples have much higher income aspirations than singles.  Those who have previously had lower incomes have lower income aspirations (I tell myself, therefore, that experience the relative low income of being a student is a good thing).  More education correlates with higher income aspirations (oh well...), as does being a foreigner, and being self-employed.  This 'foreigner' aspiration could also explain why foreigners are relatively less happy - they expect higher income, but for some reason do not obtain it, and thus are less happy with the status quo. 

Stetzer's results support the hypothesis that aspirations have a negative impact on subjective well-being, or satisfaction.  For some people the effect might counteract completely the positive impacts from having a higher income.  Stetzer's evidence offers crucial support for the notion that we experience satisfaction, wellbeing, and therefore utility in a relative and not in an absolute manner.  The evidence for this continues to mount - the days of absolute utility functions cannot be maintained for much longer.  That said, I think that the basic notion of a utility function in absolute levels up to some level for the 'necessaries' in Adam Smith's words is probably accurate. Recall though, that for Smith, also have a contingent and culturally embedded meaning:

By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. (Wealth of Nations, Book V: II).

I am reminded by this how the nature of happiness, of satisfaction, of subjective wellbeing generally, and, of course, of utility, are deeply embedded in culture, in community, and in the point in time at which we experience a given act of consumption. Aspiration and adaptation are evidently part of human behaviour, be they learnt or biological, but they seem also to be the enemies of our own satisfaction.