This chapter is partly based on Van Praag and Van Weeren 1988 .
We saw in the preceding chapters that financial satisfaction does not only depend on income but on other intervening variables as well. In fact, present satisfaction is based on a norm of what is 'bad', 'sufficient', or ' good'. Such norms not only depend on the present situation, but also on what we have experienced in the past and on what we expect to experience in the future. This implies that the individual's current satisfaction will depend on his or her past experiences and expected future. In this chapter we shall try to operationalize this idea. We start with the memory part of the subject.
Contrary to what we might think, the memory process is still not well understood by psychologists (see e.g. Kahneman 1999 ; Stone, Shiffman, and DeVries 1999 ; Loewenstein and Prelec 1991 ; Frederick, Loewenstein, and O'Donoghue, 2002). Hence, we feel free to expound our own ideas, however fragmentary, on the subject.
In the previous pages we considered satisfaction functions with respect to several domains. Some domains could be described rather precisely. For instance, the financial situation is characterized by some objectively measurable variables like income y and some intervening variables x. For a specific situation (y, x) the corresponding financial satisfaction is then. We may consider the function as our norm, by which a financial situation is evaluated. Other domains like marriage or social life are difficult to describe by objectively measurable variables, although we are able to express our satisfaction with reference to those domains on a numerical scale. In this chapter we will restrict ourselves, therefore, to an empirical application with respect to financial satisfaction.
If we assume that past income influences present satisfaction norms, this implies that our log-income historyshould be included as an argument in our present satisfaction function. If we assume that other historical variables z are also relevant, they should be included as well. Then our relevant history would be . Now the first question is what the relevant history variables are. The answer may be different depending on