Good news causes happiness to jump up; over time happiness returns to its baseline. Similarly, bad news causes happiness to jump down, after which it gradually returns to its baseline. These two psychological facts mean that the dynamics of happiness can be used to systematically measure whether an individual considers an event good news or bad news, and how important the event is to that individual. This project will use the dynamics of happiness to measure how important people feel various events are. 1. Using the dynamics of happiness to understand which major life events are most important to people (when compared to other major life events) can be an important input into public policy. This project will look at many different types of events, including bereavement, illnesses, and financial events. 2. Using the dynamics of happiness to understand the importance people place on news about even modest amounts of money can give insight into the financial stresses people face and the financial choices they make. For example, a. People who watch every penny and so rejoice at small financial gains may be less likely to retire early than people who can afford to be blas? about small amounts of money. Understanding people's retirement decisions is crucial for public policy, since the solvency of the Social Security system can be strongly affected by the average retirement age. b. Studying how happiness responds to risk can help determine whether fear of facing an emotional roller coaster with every twist and turn of the stock market is an important reason many people avoid investing in the stock market. Understanding why many people avoid investing in the stock market is important because-despite the recent performance of the stock market- well-diversified low-fee stock index funds have historically done well for people who invest for the long run in order to prepare for retirement. The analysis of happiness dynamics to study the importance people place on events will use mathematical and statistical tools developed from a new economic theory of happiness-a theory that emphasizes those dynamics, and carefully distinguishes the elation and dismay people feel after good or bad news from long-run shifts of people's baseline mood. For this analysis new data on happiness and other variables will be collected both in the laboratory and in web surveys to add to existing data.
Good news causes temporary increases in happiness while bad news causes temporary decreases. The intensity and duration of these movements in happiness make it possible to measure the subjective importance of events. Measuring the subjective importance of health events can provide one input into setting public health priorities; measuring the subjective importance of financial events makes possible a better understanding of retirement timing and how attitudes toward risk affect strategies of retirement saving.
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