The role of subjective well-being data in valuation

All preference-based approaches rely on people’s ability to make rational and accurate judgements about how something will make them feel in future. This is also true of market prices. However, evidence from psychology and behavioural economics suggests that people’s rationality may be bounded at best and “coherently arbitrary” (Ariely, Loewenstein and Prelec, 2003) at worst. In particular, various biases have been identified that distort estimates of well-being gained from various experiences (Sugden, 2005; Kahneman and Tversky, 2000; Sugden, 2005; Schkade and Kahneman, 1998; Wilson and Gilbert, 2005; see Box 4.6). Fujiwara and Campbell (2011), Sugden (2005) and Frey, Luechinger and Stutzer (2004) review how these biases challenge stated preference-based approaches to the valuation of non-market factors.

An alternative approach to valuation involves using life evaluations (usually life satisfaction) data to directly estimate the impact of a particular outcome on how people feel after the event - thus replacing a hypothetical judgement with ex post calculations of impact based on the level of subjective well-being actually achieved. Relative to stated preference approaches, this should remove problems associated with, for example, focusing illusions, because respondents are not prompted to think about the source of their well-being. There is also less risk of strategic responding on the part of individuals, i.e. intentionally over- or under-estimating the value of a good due to personal interests in the outcome of a valuation process.

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