Happiness, Herds and the Financial Crisis
Andrew OswaldUniversity of Warwick
Economics is changing
Researchers are studying mental well-being.
We are drawing closer to psychology and medicine.
Using random samples from many nations:
Researchers try to find what influences the psychological wellbeing of
(i) individuals
(ii) nations.
Regression equations
Mental well-being = f(Age, gender, education level, income, marital status, friendship networks, region, year…)
On a technical note
To economists and any mathematicians here:
I have in mind a class of problem where utility depends on relative actions.
Imagine a person is choosing an action a to solve:
Maximize u(a) + v(a – a*) – c(a)
where a* is what everyone else is doing.
Then if v is concave (convex) in status, it is rational to act similarly to (deviantly from) the herd.
From the U.S. General Social Survey (sample size 40,000 Americans approx.)
• “Taken all together, how would you say things are these days - would you say that you are very happy, pretty happy, or not too happy?”
The distribution of life-satisfaction levels among British people
0
5
10
15
20
25
30
35
Per
cen
tag
e o
f P
op
ula
tio
n
1 2 3 4 5 6 7
Self-rated Life Satisfaction
Source: BHPS, 1997-2003. N = 74,481
Typical GHQ mental-strain questions
Have you recently:
Lost much sleep over worry?Felt constantly under strain?Felt you could not overcome your difficulties?Been feeling unhappy and depressed?Been losing confidence in yourself?Been thinking of yourself as a worthless person?
Average GHQ Psychological Distress Levels Over Time in Britain: BHPS, 1991-2004
Oswald-Powdthavee, Economic Journal, June 2007
10.90
10.95
11.00
11.05
11.10
11.15
11.20
11.25
11.30A
vera
ge
GH
Q-1
2 (l
iker
t)
1991-1994 1995-1999 2000-2004
The road to nowhere
• Growth in income is now not correlated with growth in happiness
• This is the “Easterlin paradox”
Average Happiness and Real GDP per Capita for Repeated Cross-sections of Americans.
1.8
22.2
2.4
2.6
Mea
n H
app
iness
15
00
018
00
021
00
024
00
0R
eal G
DP
pe
r C
ap
ita
1975 1980 1985 1990 1995Year
Real GDP per Capita Mean Happiness
A taste of research (1)
Happiness is high among:
The young and oldMarried and cohabiting peopleThe highly educatedThe healthyWomenPeople with strong friendships
Reported happiness is correlated with…
• A person’s happiness as assessed by friends, family and spouse
• How many times a person smiles• Person’s recall of good and bad events• Heart rate and blood pressure response to
stress• The later risk of getting coronary heart
disease• Cortisol levels
Other observables
We know too that reported well-being levels are predictive of
The probability of:
a marriage splitting up
Other observables
We know too that reported well-being levels are predictive of
The probability of:
a marriage splitting up
a worker quitting a job
Across nations, hypertension and happiness are correlated (Blanchflower and Oswald, forthcoming, Journal of Health Economics)
0
10
20
30
40
50
Figure 2.The Inverse Correlation Between Hypertension and Life
Satisfaction: 16 European Nations Aggregated into Quartiles
Countries in the Countries in the lowest quartile highest quartile of blood-pressure of blood-pressure
IrelandDenmarkN'LandsSweden
SpainFranceLuxUK Austria
ItalyBelgiumGreece
E. GermanyW. GermanyPortugalFinland
P
erce
nta
ge o
f citi
zens
ver
y sa
tisfie
d w
ith t
heir
live
s
Per
cent
age
of c
itiz
ens
very
sat
isfi
ed w
ith
thei
r li
ves
The pattern of a typical person’s happiness through life
4.9
5.0
5.1
5.2
5.3
5.4
5.5
5.6
15-20 21-30 31-40 41-50 51-60 61-70Age group
Ave
rag
e li
fe s
atis
fact
ion
sco
re
What about money?
The data show that richer people are happier and healthier.
But in particular
Relative income is what seems to matter to humans.
(consistent with Easterlin’s paradox)
Such relative-income variables show up consistently in well-being equations.
Blanchflower-Oswald, Journal of Public Economics 2004
Luttmer, Quarterly Journal of Economics 2005GDA Brown et al, Industrial Relations, forthcoming
A taste of research (2)
Happiness is particularly low among:
The unemployed
Newly divorced and separated people
A taste of research (2)
Happiness is particularly low among:
The unemployed
Newly divorced and separated people
ps… and children have no effect on happiness
The evidence suggests that when a person is made unemployed:
• 20% of the fall in mental well-being is due to the decline in their income
• 80% is due to non-pecuniary things (loss of self-esteem, status..).
A taste of research (3)
Countries are happier if they have low unemployment and inflation, and generous welfare benefits.
A taste of research (3)
Countries are happier if they have low unemployment and inflation, and generous welfare benefits.
‘Fear’ depresses happiness.
R. Di Tella, R. Macculloch, A.J. Oswald American Economic Review, 2001.
In a recession
there is a widespread decline in mental well-being, we think because of the generalized insecurity.
The importance of relative things to well-being provides an important clue about what has driven the Credit Crunch.
• "Men … think in herds; they go mad in herds, … they only recover their senses slowly, and one by one."
C. Mackay
Extraordinary Popular Delusions and the Madness of Crowds, by Charles MacKay, published in 1841.
Far from the Madding Crowd, by Thomas Hardy, published in 1874.
Herd behaviour is very often natural and individually rational. But it has the potential to be disastrous for the group.
Herd behaviour is very often natural and individually rational. But it has the potential to be disastrous for the group.
Subconsciously, humans are frightened of falling behind:
• Bank lenders and brokers felt they had to match rivals.
• Home buyers paid extraordinary prices in order to keep up.
• Money managers -- rewarded on relative performance against other managers -- copied what the others did.
When rewards depend on your relative position
it will routinely be
(i) dangerous to question whether the whole group’s activity is flawed
(ii) rational simply to compete hard within the rules that govern success.
When rewards depend on your relative position
it will routinely be
(i) dangerous to question whether the whole group’s activity is flawed
(ii) rational simply to compete hard within the rules that govern success.
Correct dotcom analysts were fired.
Yet -- even two or three years ago near the peak -- few people spoke about the apparent likelihood of a crash.
Yet -- even two or three years ago near the peak -- few people spoke about the apparent likelihood of a crash.
…another kind of herd action.
Points to take away
1. Unemployment is extraordinarily damaging to human well-being.
2. Recession ‘fear’ hurts everyone.
Points to take away
1. Unemployment is extraordinarily damaging to human well-being.
2. Recession ‘fear’ hurts everyone.
3. We have to integrate herd behaviour into economics.
Points to take away
1. Unemployment is extraordinarily damaging to human well-being.
2. Recession ‘fear’ hurts everyone.
3. We have to integrate herd behaviour into economics.
4. Some lean years are now needed.
Points to take away
1. Unemployment is extraordinarily damaging to human well-being.
2. Recession ‘fear’ hurts everyone.
3. We have to integrate herd behaviour into economics.
4. Some lean years are now needed.
5. The madness of crowds will be back.
Happiness, Herds and the Financial Crisis
Andrew OswaldUniversity of Warwick
Papers downloadable at www.andrewoswald.com