A New Index for Financial Well-Being

by Laura Rowley

In the 1880s, British economist Francis Edgeworth proposed creating an instrument called a "hedonimeter" that could measure, physiologically, how much pleasure a person derived from a specific choice. Edgeworth suggested that the hedonimeter would expand utility analysis from theoretical economics to the real world, helping individuals maximize their welfare and societies create better public policy.

The Hedonimeter Reborn

A group of researchers is reviving the notion of the hedonimeter, at least philosophically. They've developed a method to measure, compare, and analyze how people spend and experience their time, across countries and over time. The idea is similar to Edgeworth's -- if we have a quantitative way to measure which activities bring pleasure to most people most of the time, we can make better decisions to enhance our well-being.

"We're really interested in describing people's lives as they experience them, as opposed to theories about their lives, and from that get an overall measure of how people are doing," says David Schkade, professor of management at the Rady School of Management at University of California, San Diego.

The study, co-authored with Nobel Laureate Daniel Kahneman and Alan Krueger of Princeton; Norbert Schwarz of the University of Michigan; and Arthur Stone of Stony Brook University, will be published by the University of Chicago Press later this year.

What's Your U-Index?

What does this have to do with money and happiness? Researchers say people can manipulate 40 percent of their happiness through their day-to-day choices (the other 60 percent is natural disposition and circumstances, such as health and wealth). While many decisions are no-brainers -- going to see a movie is more fun than taking out the garbage -- most of us are faced with tradeoffs in utility that aren't so clear-cut: Live close to work in a smaller house, or commute an hour each way to get a bigger one? Take the higher-paying job with travel away from family, or the lower-paying one close to home? Spend extra time volunteering, or selling stuff on eBay to make extra cash?

To illustrate their approach, researchers asked 4,000 Americans to track how they spent their day, then isolated three random events and interviewed them on their emotions --pleasant or unpleasant, passive or active. They summarized the data in something they call a "U-Index" ("U" for unpleasant).

"We're trying to come up with a meaningful way to talk about well-being that sounds like the poverty rate or the unemployment rate," says Schkade. The approach captures how people feel about their tasks shortly after they perform them, avoiding the brain's tendency to misremember what actually occurred. The higher a person or group scores on the U-Index, the greater the unhappiness.

Driven to Unhappiness

Study participants were happiest when socializing, playing sports and exercising, doing spiritual activities, and relaxing. Watching television ranked in the middle, as did food preparation and volunteering. The most unpleasant tasks included housework, working for pay, household management, receiving medical care, education, and caring for adults.

"One of the worst activities for all the people we survey is commuting. The only thing that ranks below commuting is commuting with your boss." says Schkade.

His advice for someone deciding between a 30-minute commute from a tiny, expensive house, and a 90-minute commute from a McMansion: "Commuters are not masters of life, their schedule is. If you can transfer two hours to something more pleasant, that can make a big structural difference in how good life is. We don't have the causal thing nailed down completely, but certainly our research begs for people to make that tradeoff."

The More the Less Merry

In addition, the study found conflicting trends related to the pursuit of ever-higher income and education. People in households with annual incomes below $30,000 spend almost 50 percent more time in an unpleasant state than do people with incomes above $100,000. On the other hand, a historical comparison found that unhappiness has declined more for men with a high school degree or less than for men with a college degree or higher. (The result corresponds with a recent study that found leisure time has increased more for the less educated than the highly educated.)

I was discussing this with a friend recently, who seems to have found the ultimate sweet spot in his career. He makes a comfortable living, works fewer than 40 hours a week, is highly respected at work, and has a great boss, lots of autonomy, and no employees to supervise. He knows he could land his boss' job at another company and get a whopping raise. But he would have to travel, supervise people, work longer hours, and answer to higher, possibly more demanding powers.

"People who have more income typically have more responsible jobs," says Schkade. "That extra money comes with additional things that are not as pleasant: They can't leave at 5 p.m. when the whistle blows; they might have stress because they have to hire and fire people. That's why changing features like income and education don't seem to have as much of an effect on happiness as we think, because they have tradeoffs. When we think about them, we only think about the good things."

GNP ≠ National Well-Being

Another benefit to the U-Index is getting a more accurate picture of things we tend to idealize -- like parenthood. "Some of the least happy people we see in surveys are mothers with young children," says Schkade. "We think it's because they are working and stretched too thin."

That's not to say the index would make you decide against having children. But you might recognize the near impossibility of combining toddlers with a tortuous commute to work, and make informed decisions about where to work, where to live, or what kind of child care to use -- and thus avoid learning through nightmarish experience.

From a public policy perspective, the backdrop of the U-Index is a recognition that traditional ways of tracking a country's progress -- gross national product or national income measurements -- don't provide a full picture of national well-being. As Robert Kennedy put it in a 1968 speech: "Our gross national product ... measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile."


Popular posts from this blog

Do you want to get into Goldman Sachs?

Warren Buffett’s favorite market metric suggests investors are ‘playing with fire’