Why income comparison is rational

Abstract

A major factor affecting a person's happiness is the gap between their income and their neighbors', independent of their own income. This effect is strongest when the neighbor has moderately higher income. In addition a person's lifetime happiness often follows a " U" shape. Previous models have explained subsets of these phenomena, typically assuming the person has limited ability to assess their own (hedonic) utility. Here I present a model that explains all the phenomena, without such assumptions. In this model greater income of your neighbor is statistical data that, if carefully analyzed, would recommend that you explore for a new income-generating strategy. This explains unhappiness that your neighbor has greater income, as an emotional " prod" that induces you to explore, in accord with careful statistical analysis. It explains the " U" shape of happiness similarly. Another benefit of this model is that it makes many falsifiable predictions. © 2009.