The Happiness Dilemma (Feldman)

by Kevin Feldman, iShares

A few weeks ago, my colleague Russ blogged about a new bias that he is noticing among investors. Regardless of where his job has taken him — be it Australia, Latin America, Europe or even the United States — Russ is finding that investors have become overly pessimistic about their home country.

After reading his blog this journal article — “The Financial Crisis and the Well-Being of Americans” by Princeton economist Angus S. Deaton — caught my eye. Yes, it is US-focused, but it may be able to partially explain some of the gloom among global investors.

We all know that the financial crisis has been difficult, and I imagine it’s made most of us unhappy at various times. After all, 60% of American households saw their wealth decline between 2007 and 2009. Deaton wanted to examine more precisely the relationship between the crisis and American happiness — “self-reported subjective well-being,” or SWB, in economist jargon. Which parts of the crisis hit people the hardest?

Deaton turned to data from Gallup, which happens to conduct polls on popular well-being. Since January 2008, Gallup has randomly polled 1,000 Americans, asking them questions intended to measure happiness. How are their lives going? Are they satisfied with their standard of living?

According to Gallup, in the fall of 2008 and spring of 2009, Americans reported “sharp declines in their life evaluation” and “sharp increases in worry and stress.” The most stressed-out respondents were those who had lost jobs; because getting laid-off was so damaging to their self-esteem, the newly unemployed felt the hit even more deeply than the amount of lost income seemed to justify.

Still, Deaton points out, the unemployed constitute a relatively small minority of the population; most Americans were feeling better by the end of 2010. (Unfortunately, that’s where Deaton’s study ends) So what explains this improvement in the national mood?

It wasn’t gains in employment, which were largely non-existent. Instead, the main reason people got happier seemed to be that the stock market had recovered from its plunges of ’08 and ’09. Americans’ emotional well-being tracked almost exactly the hills and valleys of the stock market. (Perhaps that is why Russ witnessed such pessimism among investors. Between the beginning of August and the end of September, the Dow Jones Industrial Average fell 10 percent.)

If you’re an investor, this probably doesn’t surprise you; seeing one’s portfolio nosedive would depress most of us. But as Deaton reminds, “most Americans have no direct or indirect interest in the stock market,” because most Americans don’t own stock outside of pension plans, including 401(s) and IRAs. (Only about 20%, according to one survey.) If that’s the case, why were Americans who weren’t nearing retirement feeling so bummed out?

The answer, according to Deaton, is that non-stop media coverage of the stock market made people anxious even if they weren’t invested in it. “For much of the financial crisis,” he writes, “the stock market became the most watched indicator, not only of the present but also of the future. ….The stock market was the indicator of the state of the economy, something that would have been less true in normal times.”

In other words, there was a disconnect between the level of popular anxiety about the stock market and the level of popular investment in the stock market. But that anxiety wasn’t completely illogical. If you were nearing retirement or owned equities to support future retirement, feeling anxious was understandable. If you were part of a lower-income household, you might not have been invested in the market, but you may have taken market declines as predictors of future unemployment.

The media-fueled fixation on stock prices, Deaton concludes, makes him think that SWB is “essentially irrelevant for any concept of well-being that we care about.” Happiness-related polling data may just be too sensitive to media coverage, too disconnected from economic reality. “In a world of bread and circuses,” Deaton concludes, “measures like happiness that are sensitive to short-term ephemera, and that are affected more by Valentine’s Day than to a doubling of unemployment, are measures that pick up the circuses but miss the bread.”