Macroeconomics and Individual Decision Making

NBER Reporter, Winter 2006 | Go to article overview

Macroeconomics and Individual Decision Making


The NBER's Working Group on Macroeconomics and Individual Decision Making held a conference in Boston on November 4. Working Group Directors George Akerlof, University of California at Berkeley, and Robert Shiller, NBER and Yale University, organized the meeting. These topics were discussed:

"Utility and Happiness"--Miles Kimball, University of Michigan and NBER, and Robert Willis, University of Michigan

Discussant: Christopher Hsee, University of Chicago

"Leadership in Groups: A Monetary Policy Experiment"--Alan S. Blinder, Princeton University and NBER, and John Morgan, University of California at Berkeley

Discussant: Petra Geraats, University of Cambridge

"Why Has CEO Pay Increased So Much?"--Xavier Gabaix, MIT and NBER, and Augustin Landier, New York University

Discussant: George Baker, Harvard University and NBER

"Coarse Thinking and Persuasion"--Sendhil Mullainathan and Andrei Shleifer, Harvard University and NBER, and Joshua Schwartzstein, Harvard University

Discussant: Eric Zitzewitz, Stanford Univcrsity

"The Rising-Tide Tax System: Indexing (at Least Partially) for Changes in Inequality"--Leonard Burman and Jeffrey Rohaly, Tax Policy Center, and Robert Shiller

Discussant: Christopher Foote, Federal Reserve Bank of Boston and NBER

"A Cognitive Theory of Identity, Dignity, and Taboos"--Roland Benabou, Princeton University and NBER, and Jean Tirole, IDEI and GREMAQ, Toulouse

Discussant: Robert Oxoby, University of Calgary

Psychologists have developed effective survey methods of measuring how happy people feel at a given time. The relationship between how happy a person feels and utility is an unresolved question. Existing work in economics either ignores happiness data or assumes that felt happiness is more or less the same thing as flow utility. The approach Kimball and Willis propose steers a middle course between the two polar views that "happiness is irrelevant to economics" and the view that "happiness is a sufficient statistic for utility." They argue that felt happiness is not the same thing as flow utility, but that it does have a systematic relationship to utility. In particular, they propose that happiness is the sum of two components: 1) elation--or short-run happiness--which depends on recent news about lifetime utility; and 2) baseline mood--or long-run happiness--which is the output of a household production function like the household production functions for health, entertainment, and nutrition. Because happiness is itself one of the arguments of the utility function, the determinants of happiness affect behavior. Moreover, because happiness depends on recent news about lifetime utility, short-run movements in happiness data provide important information about preferences. This theory of the relationship between utility and happiness provides a new explanation for the Easterlin paradox of secularly non-increasing happiness as the consequence of the Baumol cost disease for happiness and an explanation for loss-aversion based on the dependence of happiness on recent news.

In an earlier paper, Blinder and Morgan created an experimental apparatus in which Princeton University students acted as ersatz central bankers, making monetary policy decisions both as individuals and in groups. In this study, they manipulate the size and leadership structure of monetary policy decisionmaking. They find no evidence of superior performance by groups that have designated leaders. Groups without such leaders do as well as or better than groups with well-defined leaders. Furthermore, they find rather little difference between the performance of four-person and eight-person groups; the larger groups outperform the smaller groups by a very small margin. …

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