July 2006

IZA DP No. 2208: Does Happiness Adapt? A Longitudinal Study of Disability with Implications for Economists and Judges

published in: Journal of Public Economics, 2008, 92 (5-6), 1061-1077

Economics ignores the possibility of hedonic adaptation (the idea that people bounce back from utility shocks). This paper argues that economists are wrong to do so. It provides longitudinal evidence that individuals who become disabled go on to exhibit recovery in mental wellbeing. Adaptation to severe disability, however, is shown to be incomplete. The paper suggests ways to calculate the level of compensatory damages for the pain and suffering from disablement. Courts all over the world currently use ad hoc methods.