We model happiness as a measurement tool used to rank alternative actions. Evolution favors a happiness function that measures the individual’s success in relative terms. The optimal function, in particular, is based on a time-varying reference point –or performance benchmark –that is updated over time in a statistically optimal way in order to match the individual’s potential. Habits and peer comparisons arise as special cases of such updating process. This updating also results in a volatile level of happiness that continuously (...) reverts to its long-term mean. Throughout, we draw a parallel with a problem of optimal incentives, which allows us to apply statistical insights from agency theory to the study of happiness. (shrink)

© 2004 by Gary S. Becker, Kevin M. Murphy, and Michael Grossman. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

For several centuries, economists, sociologists, and philosophers have been concerned with the magnitude and e¤ects of inequality. Economists have concentrated on inequality in income and wealth, and have linked this inequality to social welfare, aggregate savings and investment, economic development, and other issues. They have explained the observed degree of inequality by the e¤ect of random shocks, inherited position, and inequality..