Wellbeing policy: what lessons from the Nobel laureate Daniel Kahneman?

In 2002, Daniel Kahneman was awarded the Nobel Prize in Economic Sciences – the first psychologist to win it. He got the prize because of the work he had done with Amos Tversky on how people make decisions.

In this work, they challenged the central assumptions of standard economics that people are rational, consistent and selfish. In a series of dazzling experiments, they showed how wrong these assumptions can be.

For example, people are hugely affected by how the choices facing them are framed. In one natural experiment, four US companies changed their approach to company pensions. Initially, workers had to opt into the contribution-based pension plan (pushing a button, as it were, to contribute). But after the change, workers were automatically enrolled unless they opted out. The proportion of workers enrolled leapt from under 45% to over 81%, even though the fundamentals of the choice were unchanged.

Similarly, people hate to lose anything (what’s known as ‘loss aversion’). Consider the following experiment: two randomly selected groups (A and B) were offered identical choices, differently described.

The majority of Group A refused to accept the gamble, while the majority of Group B agreed to participate in the lottery. And yet both these offers were identical (just check it out). The reason for the different answers was that Group A heard the word ‘losing’ while Group B did not.

Kahneman and Tversky documented dozens of other ways in which people’s judgements and decisions are influenced by biases of all kinds – and often ignore elementary statistical factors. But if human beings are not rational, this drives a coach and horses through standard economic theory, and through traditional cost-benefit analysis. For if people are irrational, you can no longer estimate the social value of anything by what people are willing to pay for it.

So how can we find out the true value of anything?

Danny had the answer: find out how it affects their wellbeing. In other words, measure the effects of a policy through direct measurement (in a trial, for example) of how it affects their wellbeing. This was, as Danny put it, a programme of ‘Back to Bentham’. As a Benthamite from the age of 21, I thought this was terrific. But did we have these measures? Fortunately, the psychologist Ed Diener had started measuring subjective wellbeing in the 1980s, and Danny seized on his work. When Danny got the Nobel prize in 2002, this immediately made measurable wellbeing a reputable concept.

That was when we started our wellbeing programme at the Centre for Economic Performance at the London School of Economics, with constant help from Danny. Altogether I can remember at least ten times when he came over, often bringing his colleagues. And of course we went to him at Princeton.

With his help, Paul Dolan and I persuaded David Cameron, the UK’s then prime minister, to measure the nation’s wellbeing as an official statistic, including at least two questions that Danny had designed. Shortly afterwards, the OECD recommended its members to use the same questions, which all OECD countries except the United States now do. In the meantime, Danny was very active in persuading Gallup to measure happiness and life satisfaction in every country, and those measures now form the core of the annual World Happiness Report.

Wellbeing as the target of public policy

The real point of all this was to make wellbeing the target of public policy, as Danny advocated. In 2019, the European Union invited its members to put wellbeing at the centre of policy design, and the OECD has followed suit.

But the UK has made more current progress than anyone else. In 2020, my colleagues Paul Frijters and Christian Krekel published a Handbook for Wellbeing Policy-Making, and shortly afterwards the Treasury Green Book was amended to encourage the use of direct measures of wellbeing where willingness to pay cannot be computed. This will be the basis of the upcoming spending review – with the UK being the first country to evaluate policy by how it affects the life satisfaction of the citizens. None of this would have happened without Danny’s support and his prestige behind it. And these effects have only just begun to be felt.

How should we measure wellbeing?

Note though that we didn’t always agree about exactly how wellbeing should be measured. The first issue concerned the use of simple overall questions. In 2004, Danny, Alan Krueger and some others pioneered what they called the ‘day reconstruction method’. This recorded what you did hour-by-hour and how you felt. Danny thought that the main role of the state should be to prevent misery and he therefore used this method to construct for each individual a misery index – measuring how much of the day people were miserable.

But as we economists argued, the state also has a major role in supporting the good life for everybody. Danny eventually agreed, but he still wanted the measure to be a hedonic one (like ‘how happy were you yesterday?’) rather than an evaluative one (like ‘overall how satisfied are you with your life nowadays?’). But eventually, he came to the view that memory plays such an important role that life satisfaction is after all the best.

Danny was wonderful fun to be with. He was so clever but also so sweet-natured. You couldn’t help loving him. He was surely the most influential person I have ever known, and his influence can only grow from year to year.

Please read his great book on Thinking, Fast and Slow.

Where can I find out more?

• Daniel Kahneman: background on his Nobel Prize ‘for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty’.
• Find out more about the World Happiness Report, and read the latest, 2024, version, here.
• Happiness economics: Can we have an economy of wellbeing? VoxEU column by Carol Graham.
• A Handbook for Wellbeing Policy-Making: History, Theory, Measurement, Implementation, and Examples – 2021 book by Paul Frijters and Christian Krekel.
• Happiness: Lessons from a New Science – Richard Layard’s book, first published in 2005.
• Wellbeing: Science and Policy – Richard Layard and Jan-Emmanuel De Neve’s textbook, the first field-defining book on the subject.

Who are experts on this question?

• Maria Cotofan
• Andrew Clark
• Jan-Emmanuel De Neve
• Paul Dolan
• Paul Frijters
• Carol Graham
• John Helliwell
• Christian Krekel
• Richard Layard
• Andrew Oswald
• Daniel Sgroi

Author: Richard Layard

Image: Nobel laureate Daniel Kahneman by Steve Jurvetson via Wikimedia Commons