Monday, November 16, 2009

Want to price happiness?

Paul Fritjers is your man. His methodology looks good.

What's a marriage worth?

To an Aussie male, around $32,000. That's the lump sum Professor Paul Frijters says the man would need to receive out of the blue to make him as happy as his marriage will over his lifetime. An Aussie woman would need much less, around $16,000.

But when it comes to divorce the Aussie male will be so devastated it would be as if he had lost $110,000. An Aussie woman would be less traumatised, feeling as if she had only lost $9000.

Recently named this year's Best Australian Economist under 40 by the Economic Society of Australia, the Queensland University of Technology professor knows this because he has been mining a unique set of data that has tracked the happiness and major life events of around 10,000 Australians once a year since 2001.

"These are real people to whom unexpected things happen. They weren't selected because these things would happen, and we can compare their happiness before and after," Professor Frijters told the Herald after presenting his findings at the Australian National university.

Asked to describe how satisfied they are with their lives on a scale of 0 to 10, the Australians surveyed most often use the number 8...

...but the answers change after (and sometimes in anticipation of) major life events and also after sudden changes in income.

That's enabled the professor to put dollar values on the effects on happiness of major events such as marriage, divorce and birth, or as he puts it to calculate their "psychic costs" or "psychic benefits".

The birth of a child turns out to bring both. It makes parents the happiest before it happens and then after some months slightly less happy than they would have been without the birth Which is why Professor Frijters puts low dollar values on the lifetime boost to happiness that flows from a birth - for the mother around $8700, for the father $32,600.

"Losing a loved one has a much bigger effect than gaining a loved one. There's a real asymetry between life and death," he says. "This shouldn't surprise us. Human beings seem primed to notice losses more than gains."

The death of a spouse or child causes a woman $130,900 worth of grief according to Frijters' calculations. It costs a man $627,300.

"This isn't the value of the life that's lost, that would be much higher," he says. "This is just the effect on the happiness of one person flowing from a death."

Asked why his calculations show men much more affected by life's events than women, Professor Frijters says he doesn't know. "But it does tend to give me confidence in the calculations. We know for instance that marriage improves the lives of men much more than women."

Some of the results fit in with stereotypes. Women get a psychic boost of $2600 from moving house. Men suffer psychic pain of $16,000.

Professor Frijters' dollar figures are lower than those arrived at by other methods. He says that's because he finds that money has a greater effect on happiness than previously thought. "Losing or gaining money can offset the effect of other life events quite well, and that's what we are formally looking at - the amount needed to offset an event or keep someone happiness-neutral." he says.

Insurance companies and lawyers take a keen interest in the research he says, because the need to find dollar amounts for compensation payouts, and also the Australian government which funds the Household Income and Labour Dynamics Survey through the Department of Families, Housing and Community Services.

Published in today's SMH and Age

What's it worth? Happiness converted to dollars

Woman Man

Marriage + $15,600 + $31,600
Birth of child + $8700 + $32,600
Separation - $8900 - $109,300
Death of loved one - $130,900 - $627,300
Illness - $50,300 - $360,000
Moving home + $2600 - $16,000

Lump sum. Average of 5% and 10% discount rates

Frijters, Paul, Johnston, David W. and Shields, Michael A., Happiness Dynamics with Quarterly Life Event Data. IZA Discussion Paper No. 3604

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