Utility & the Economics of Happiness: How to Measure Your State of Well-Being

By Cheryl Grey, on October 8th, 2008

One of the fundamental concepts in economics is utility, which, in the cant of the profession, means whatever works for you. Utility is a need, a preference, a source of satisfaction; if it improves your physical, spiritual or emotional well-being, then it’s said to give you utility.

Many people assume that utility is associated with money or wealth. While that can be true, the term covers much more ground than that and, in fact, can be expansive.

Utility: The Measure of One’s Satisfaction

In the excellent primer Naked Economics: Undressing the Dismal Science, author Charles Wheelan presents the example of a can of tuna. For some people, utility is contained within the inexpensive generic brand found on the bottom shelf. For others, it’s worth the additional cost to purchase the name brand that advertises itself as “dolphin and turtle friendly.” For hungry people in disadvantaged regions of the world, it’s whatever brand they can get.

This example points out one of the underlying principals of utility: it’s different for everyone and can change over the span of a lifetime, usually in conjunction with one’s political views. What comprises a person’s utility varies according to income and educational levels. However, we all want as much of it as we can get, and economic theory is based on the fact that people do what maximizes their utility in the same way that companies maximize their profitability.

And therein lies the problem.

Utility without Happiness

Maximizing utility isn’t necessarily the same as finding happiness or contentment. To again borrow from Wheelan, immunizations give us utility because they prevent us from dying of a preventable disease; however, few people actually enjoy being stuck with a hypodermic needle.

Other notable examples of utility trumping happiness include waiting at traffic lights, paying taxes and staying in a high-paying job that you detest. Some of these examples are part of the sacrifices we all make toward the greater good; however, some of the choices we make, or feel we are forced to make for financial reasons, give us utility but not happiness.

It is true that the citizens of rich nations tend to self-report themselves as happier than those of poor nations. However, studies performed within both categories show that, as long as per capita income in a nation is sufficient to provide for the basic necessities of life (currently around US$15,000), the level of happiness claimed isn’t directly correlated with the level of wealth owned, meaning that money really doesn’t buy happiness, at least not according to these researchers. When the number of lottery tickets sold diminishes, we’ll know people believe them.

The Study of Happiness

Enter the new field of happiness economics, a fascinating but uneasy blend of economics and psychology, which seeks to measure not merely a nation’s gross domestic product but also the level of emotional well-being among its citizens.

Measurements for these criteria include the Satisfaction with Life Index, which comes right out and asks people how happy they are. There is obviously an issue here with subjectivity, but when measured internationally and plotted on a map, as shown in the image at the beginning of this article, the results tend to support the concept of money buying, if not outright happiness, then at least the basics required to survive so that a person can pursue it. On the illustration, green equals most happy, then blue, purple, orange and finally red equals least happy, while grey means the data weren’t available.

Other indices used by happiness economists lean less on subjective self-reporting and more on somewhat harder data. These include:

  • Happy Life Years, which blends self-reported happiness with life expectancy;
  • the Happy Planet Index, which branches out from human happiness to also include a nation’s ecological impact; and
  • Gross national happiness, an index proposed by the King of Bhutan in 1972 which seems to depend less on any strict definitions of anything and more on his own personal preferences.

The true problem with the concept of happiness economics is that happiness is not only difficult to define, it’s also difficult to compare across cultures. The wild joy the Western world believes to be the ultimate in happiness has little appeal for more spiritual nations, where the goal is a Buddhistic calm.

The danger here lies in the political ends to which a happiness index can be turned. Bhutan remains dependent upon subsistence farming with 32% of its population living in abject poverty. But it’s the happiest nation in Asia.



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Health Insurance Companies Take Advantage of Doctors, Part III

By J.C., on October 8th, 2008

In the medical industry, there is a dirty word called “bundling.” Bundling is the combining of multiple procedure codes into a general substitution code that ignores procedure code modifiers. Essentially, it is one of the ways insurance companies figure out how to pay doctors less. Here is an example of how the mechanics of reimbursement work in relation to procedure coding:

After a doctor sees a patient, he submits a claim form to the insurance company that lists all the procedures he did on the patient. The procedural coding method is quite complex and involves a series of modifiers when the procedure strays from the norm. For example, when you see your doctor for a general office visit, it is categorized as a simple, moderate, or complex office visit. The payment is different for each code, with complex reimbursing the most. Documentation for a complex visit is more extensive than a simple visit.

So how exactly does bundling work? Let’s say you go to your doctor for evaluation of hypertension. He notices that your pressure is abnormally low and that you are dehydrated. Thus, he decides to give you an IV infusion of fluid to rehydrate you. When it comes to billing, he has done three things with three different codes: evaluated you for hypertension, given you an IV, and done an infusion of fluid. The insurance company may try and bundle the two codes for IV placement and infusion together into one with the reasoning that an IV placement is included in the infusion code.

This type of bundling is widespread in every specialty of medicine and amounts to the simplification of multiple medical procedures into fewer. Thus, bundling is a technique used by insurance companies to mess with the coding system to lower reimbursement for physicians. As you can imagine, most physicians are not going to spend hours each day going over these codes and modifiers to see what they have bundled together. Some physicians actually test the system by continuously re-submitting claims with different codes until they get paid. In my opinion, manipulation of codes by physicians could be fraudulent – there is wide interpretation of how to code various procedures among the medical community. Many physicians feel that if insurance companies are manipulating codes, then doctors should fight back.

It is all a game of cat and mouse: the insurance companies bundle, and the doctors unbundle.



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What’s a Credit Crunch and Why Should We Care?

By Evelyn Black, on October 8th, 2008

The U.S. stock market has been nothing if not volatile this year, especially over the course of the past few weeks. As the current credit crisis tightened and the world watched in horror, what most people saw was the stock market spiking and plummeting, often on mere rumor and speculation, and sometimes on the strength of what seemed like nothing at all. We’ve gotten used to this show, and for many people, it has become a source of rage and disgust.

The 777 point plunge in the Dow Jones Industrial Average after the defeat of the House $700 billion rescue package was dramatic and scary. By most accounts, about $1 trillion was lost in a single afternoon. I personally lost a quarter of my 401(k). The very next day, however, more than half of that loss was recouped on the mere hope that some kind of bill would in fact pass by the end of the week, even though it was impossible to know what kind of bill that might be.

Meanwhile, radio talk shows were busy interviewing everyone who had ever held any kind of opinion about anything related to finance, and some of it was not just misleading, it was nuts.

For instance, at one point I heard the crisis described as something that would “…make it harder for people to get car loans and would also cause small businesses to have to use their credit cards instead of lines of credit with their banks.” At the other end of the spectrum was a semi-hysterical comment by a cable news pundit who said, “People want to know if they will be able to use their ATMs by the end of the week!”

Both of these remarks are misleading.

First of all, the ATM issue is not an issue. Sometimes ATMs don’t work even when there isn’t a credit crisis. The things actually run out of money sometimes, often on Sundays, and on top of that they are subject to computer software glitches, mechanical breakdowns, and all sorts of other gremlins that are just part of life. Stuff happens with ATMs, and the credit crisis is not the kind of “stuff” that happens to them. It’s not related at all. You have no more reason to worry about your favorite ATM now, this week, than you ever have.

So calm down.

The other remark is just as misleading though. If auto loans are harder to get and business trips are put off, that’s bad for the economy, certainly. But explaining the credit crunch this way gives the impression that it is something that will just make people tighten their belts a bit, and tightening our belts is something that the overwhelming majority of us feel is long overdue and probably a good thing. I have noticed a real effort on the part of the media not to scare people. Fine. But let’s be honest at least.

The real scare with a credit crunch has nothing to do with your purchasing habits and everything to do with the fact that so many businesses, including big banks, run on short term credit. By short term I mean a day, a week, sometimes a month. A business needs this credit to even out cash flow so it can function properly. So, for instance, the garden center where you work as a clerk probably makes about 80% of its money in May and June. The rest of the year, your paycheck is likely written on a line of credit from the bank. This is true of many businesses, especially retail and construction. Profit is not spread evenly over twelve months.

Free flowing credit is good for business because, over the course of a year, if a business still makes lots of money during that May and June flower frenzy, they will turn a profit and stay current on their short term lines. The bank stays happy, the business stays happy, and you stay employed and get paid in checks that don’t bounce. You take those good checks to your bank and spend the money on stuff, and the world goes round and round like it should.

When credit gets too tight, it’s like throwing a wrench into the gears of that whole system, and commerce grinds to a halt. When commerce grinds to a halt we get a recession, or worse.

That is the fear that is behind the current attempt to “rescue” the U.S. financial system fast, but it is just abstract enough to be a non-issue for the average person. We all see that DJIA looping up and down like an out-of-control hang glider, and we think, that’s nuts. Those guys deserve to fail.

What is harder to understand is that, if those guys fail, they will retire to their homes in Martha’s Vineyard and Connecticut and Vale, and we will lose our jobs and wait in line to buy milk because, if you don’t buy it on the day it comes in, you don’t get any.

I believe that the truth is that that might happen anyway, no matter what Congress does or doesn’t do. But I also think part of the problem right now is the complexity of the situation and opaque nature of the mess our economy is currently in. The stock market is only the thermometer, and it seems to be a broken thermometer at that: One that works sometimes and other times seems completely, psychotically detached from any day-to-day reality.

The excesses of the financial world and the real estate bubble have left us with a loss of trust in our leaders and our business, and they in turn have all lost trust in each other. Nothing good happens financially in an environment in which there is no trust, and once lost, trust is a very hard commodity to lay one’s hands on.

So it’s no wonder that the American people are overwhelmingly against any government intervention in this historic economic mess. What is frightening is that by the time people do realize that this mess is going to hit them personally, and hit them hard, it may well be too late.



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