Behavioral Economics, Happiness Surveys, and Public Policy

Two important developments in recent policy analysis are behavioral economics and subjective-well-being (SWB) surveys. What is the connection between them? Some have suggested that behavioral economics strengthens the case for SWB surveys as a central policy tool, e.g., in the form of SWB-based cost-benefit analysis. This Article reaches a different conclusion. Behavioral economics shows that individuals in their day-to-day, “System 1” behavior are not EU-rational — that they often fail to comply with the norms of rationality set forth by expected utility (EU) theory. Consider now that the standard preference-based view of individual well-being looks to individuals' rational preferences. If the findings of behavioral economics are correct, an individual's answer to a question such as “How satisfied are you with your life?” is not going to tell us much about her rational (EU compliant) preferences. Behavioral economics, by highlighting widespread failures of EU rationality, might actually argue for an objective good (non-preference-based) view of well-being. However, (except in the limiting case of an objective-good view positing a single mentalistic good, happiness) SWB surveys won't be strong evidence of well-being in the objective-good sense. In short, SWB surveys are no “magic cure” for the genuine difficulties in inferring rational preferences and measuring well-being underscored by behavioral economics