Subjective Well-Being: An Intersection Between Economics And Psychology

Subjective Well-Being: An Intersection between Economics and Psychology By Christopher J Boyce Thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy in Psychology University of Warwick, Department of Psychology September 2009 ii TABLE OF CONTENTS Subjective Well-Being Research: An Overview 1.1 The Development of Subjective Well-Being Research in Economics and Psychology 1.1.1 The Use of Subjective Well-Being Data as a Proxy for Utility 1.1.2 Subjective Well-Being – A Viable Tool for Economic Analysis 1.2 Overview of Key Research Areas 1.2.1 Income and Well-Being 1.2.1.1 Evidence of a Relationship between Income and Well-Being 1.2.1.1.1 Income and Well-Being over Time 1.2.1.1.2 Income and Well-Being within a Country 10 1.2.1.1.3 Income and Well-Being across Countries 10 1.2.1.2 Explaining the Income and Well-Being Data – Relative Income Effects 11 1.2.1.2.1 Relative Income Effects in Economics 12 1.2.1.2.2 Relative Judgment Models in Psychology 13 1.2.1.2.3 Rank Income Effects 14 1.2.1.3 Explaining the Income and Well-Being Data – Income is relatively Unimportant for Well-Being 15 1.2.1.4 Explaining the Income and Well-Being Data – Personality 18 1.2.1.4.1 Controlling for Personality in Economics 20 1.2.1.4.2 Personality Interacts with Demographic Characteristics 21 1.2.2 Employment Status and Well-Being 23 1.2.2.1 Unemployment 23 1.2.2.2 Occupational Status 24 1.3 Overview of the Thesis 25 Money and Happiness: Rank of Income, not Income, Affects Life Satisfaction 27 2.1 Abstract 27 2.2 Introduction 28 2.3 Method 30 2.4 Results 31 2.5 Discussion 36 Money or Mental Health: The Cost of Alleviating Psychological Distress with Monetary Compensation versus Psychological Therapy 38 3.1 Abstract 38 3.2 Introduction 39 3.3 Money - A Common Metric for valuing Life Events and the Movement towards Compensation 40 3.4 The Clinical and Cost Effectiveness of Psychological Therapy 41 3.5 A Cost Effectiveness Comparison between Psychological Therapy and Direct Financial Compensation 42 3.6 Practical Implications of our Argument 45 3.6.1 For Judges 45 3.6.2 For Policy Makers and Society 47 Understanding Fixed Effects in Human Well-Being 49 4.1 Abstract 49 4.2 Introduction 50 iii 4.3 The Use of Personality Measures in Economics 56 4.4 Methodology 58 4.5 Data 63 4.6 Results 67 4.7 Conclusion 77 4.8 Appendix 80 4.8.1 Note to Tables 80 4.8.2 Personality Variables in GSOEP 81 4.8.2.1 Big Five Personality Inventory 81 4.8.2.2 Positive and Negative Reciprocity 82 4.8.2.3 Locus of Control 83 4.8.2.4 Pessimism 83 Which Personality Types have the Highest Marginal Utilities of Income? 85 5.1 Abstract 85 5.2 Introduction 86 5.3 Methodology 90 5.4 Data 92 5.5 Results 95 5.5.1 Robustness Tests 100 5.6 Conclusion 103 5.7 Appendix 106 5.7.1 Note to Tables 106 5.7.2 Personality Variables in GSOEP 106 5.7.2.1 Big Five Personality Inventory 107 5.7.2.2 Individual Autonomy 107 5.7.2.3 Pessimism 108 5.7.2.4 The Construction of Personality Measures 108 The Dark Side of Conscientiousness: Conscientious People Suffer more from Unemployment 110 6.1 Abstract 110 6.2 Introduction 111 6.3 Method 113 6.3.1 Participants and Procedure 113 6.3.2 Measures 114 6.4 Results 115 6.5 Discussion 118 Do People Become Healthier after Being Promoted? 121 7.1 Abstract 121 7.2 Introduction 122 7.3 Earlier Work 122 7.4 Methodology 125 7.5 Data and Estimation Issues 126 7.6 Results 129 7.7 Objections and Counter Arguments 136 7.7.1 Issue #1: Noise 137 7.7.2 Issue #2: Endogeneity 137 iv 7.7.3 Issue #3: Poor Health as a Predictor 138 7.7.4 Issue #4: Sample Changes 139 7.8 Conclusion 141 7.9 Appendix 142 7.9.1 Notes to Tables 142 7.9.2 Sample Construction 143 7.9.2.1 Control Groups 143 7.9.2.2 Treatment Groups 143 7.9.3 Definition of GHQ Mental Ill-health 144 Conclusion 145 8.1 Summary 145 8.2 Implications for Economic-Psychology Subjective Well-Being Research 148 8.2.1 The Use of Large Data Sets in Psychology 148 8.2.2 Improved Understanding of Social Comparisons 149 8.2.3 Rank Based Comparisons 151 8.2.4 Subjective Well-Being Research and Policy 151 8.2.5 The Link between Health and Occupational Status 152 8.2.6 Personality within Economics 153 8.3 Conclusion 154 References 155 v LIST OF TABLES AND FIGURES Table 2.1: Pooled OLS regression on life satisfaction comparing logarithm of absolute income and income rank by sample 32 Table 2.2: Pooled OLS regressions on life satisfaction comparing logarithm of mean income and income rank using various reference groups 34 Table 4.1: Summary statistics across the year panel used in analysis and a longer 12 year panel (N = 93016/135486) – non-standardised 66 Table 4.2: Fixed effect, REMT and pooled OLS life satisfaction regressions 68 Table 4.3: Predicting the fixed effects residual (from column of Table 4.2) using the mean levels of various objective characteristics and personality variables 70 Table 4.4: Correlations between observable characteristics and the unobservable component of the fixed effect residual errors 73 Table 4.5: Introducing personality into life satisfaction regressions using the fixed effect vector decomposition technique (3rd stage) and the random effects model 74 Table 5.1: Summary statistics (N = 93256) – non-standardized 94 Table 5.2: Fixed effect and pooled OLS life satisfaction regressions 96 Table 5.3: Fixed effects and pooled OLS analysis of income interactions with personality 99 Table 5.4: Robustness of the personality-income interactions 101 Table 6.1: Two hierarchical regression analyses predicting the life satisfaction of individuals in the years following unemployment 116 Table 7.1: Pearson correlation coefficients for the three ill-health measures 129 Table 7.2: Ill-health over time within the whole sample 129 Table 7.3: Cross-section regression equations for subjective ill-health, visits to the doctor, and mental strain 130 Table 7.4: Ill-health among the non-promoted non-supervisors and those promoted to manager (at time T) 132 Table 7.5: Ill-health among the non-promoted and those promoted to any category (at time T) 135 Table 7.6: Difference-in-Difference ((T+3)-(T-1)) estimates (with controls) for individuals working in the public sector and in the manufacturing industry, those individuals who stay at the same address across all years and those who stay in the promoted position up until T+5 136 Table 7.7: Probit equations using health at T-1 as a predictor of promotion 138 Table 7.8: Regressions showing health differences across promoted groups, and those who subsequently left the workforce or changed role 140 Figure 6.1: The life satisfaction change following unemployment as moderated by conscientiousness 118 vi ACKNOWLEDGMENTS This thesis would not have been possible without the help, advice and encouragement from so many people I have been extremely fortunate First, I would like to thank Gordon Brown and Andrew Oswald for absolute first rate supervision Both have always made themselves available to give me great guidance in my academic development I have taken great pleasure from our many meetings and both have never failed to inspire me I am also in great debt to Alex Wood who has been pivotal in my development as a researcher and who helped me develop so many of the ideas in this thesis I would also like to thank the department of psychology at the University of Warwick for making the transition from economics to psychology surprisingly easy and providing an excellent academic climate in which to pursue my research Everyone in my office has been hugely supportive and I’d like to thank them for lifting my spirits on many a grey day I am extremely grateful to Roxanne Rees-Channer whom without I would never have thought it possible for me to a PhD Thank you for helping me to believe in myself There are also many close friends who have shared with me both the good and bad times during the last years Thank you for listening to my moans I’d also like to thank everyone I’ve ever had a conversation with about my “happiness” research and for helping me to stay passionate about what I Finally, I’d like to thank my family for their love vii DECLARATION The research reported in this thesis is my own work unless otherwise stated No part of this thesis has been submitted for a degree at another institution Chapter was written in collaboration with Gordon Brown and Simon Moore Chapters and were written in collaboration with Alex Wood Chapter was written in collaboration with Alex Wood and Gordon Brown and Chapter was written in collaboration with Andrew Oswald Chris Boyce viii NOTE ON INCLUSION OF PUBLISHED WORK Certain chapters have been previously published during the period of the PhD registration Copyright of these papers resides with the publishers, but under the terms of the copyright agreements these papers are reproduced as chapters in this thesis These papers are as follows Chapter 2: Boyce, C J., Brown, G D A., Moore, S C (in press) Money and happiness: Rank of income, not income, affects life satisfaction Psychological Science Chapter 4: Boyce, C J (in press) Understanding fixed effects in human well-being Journal of Economic Psychology Chapters 3, and are currently under review ix LIST OF ABBREVIATIONS ALT: Adaptation Level Theory BHPS: British Household Panel Survey CBT: Cognitive Behaviour Therapy FE: Fixed Effects FEVD: Fixed Effect Vector Decomposition GHQ: General Health Questionnaire GP: General Practitioner GSOEP: German Socio-Economic Panel OLS: Ordinary Least Squares R: Income Rank RE: Random Effects REMT: Random Effects with a Mundlak (1978) Transformation RFT: Range-Frequency Theory SES: Socio-Economic Status SR: Subjective Income Rank SWB: Subjective Well-Being x ABSTRACT This thesis uses subjective well-being data to understand the impact that an individual’s economic circumstances have on their well-being Chapters 2, 3, and look specifically at the role of income on well-being; whilst Chapters and focus on the effect of employment status This thesis draws heavily on psychological concepts and ideas; highlighting that an interdisciplinary approach to subjective well-being data can have substantial benefits to the study of well-being Chapter seeks to understand how people compare their incomes with one another Relative judgment models from psychology are explored and the evidence suggests that individuals may be concerned with their rank position rather than their absolute position or how they compare relative to a mean level Applying this idea to relative income studies it is shown that an individual’s rank income provides a better explanation of life satisfaction than either absolute income or their income relative to the mean income of those around them Chapter highlights that although more money may reduce psychological distress it is a relatively inefficient way to so This chapter provides medical evidence to suggest that psychological therapy is a more efficient way to reduce psychological distress Income growth does not appear to increase national well-being in developed countries so this chapter suggests that increasing access to mental health care could be a better way to raise national well-being Personality, although appropriately controlled for, is mostly ignored by economists researching subjective well-being data Chapters 4, and therefore explore the use of personality measures in economic subjective well-being research Chapter proposes a new methodological technique that incorporates personality measures Chapters and then show that personality interacts with important economic variables These chapters show that personality is an important aspect to be understood by economists Chapter demonstrates the importance of using longitudinal data to understand causal effects on well-being Improvements to occupational status have been argued to lead directly to improvements to health This argument has been based solely on the cross-sectional association that individuals with high occupational status tend to have better health Chapter shows that improvements to occupational status actually tend to increase mental strain Taken altogether these studies suggest that subjective well-being data provides a useful arena in which interdisciplinary research can be conducted 166 Groves, M O (2005) How important is your personality? 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