Happiness/Stress Adjusted GDP or GDP Per Capita
From Bernoulli’s theory of Expected Utility Theory who had initially proposed “Value is absolute” centuries ago.
Nobel Laureate Legend Daniel Kahneman and Amos Tversky’s Prospect Theory proposed changes in the earlier proposition: “Value is Relative wrt Reference point that remains absolute such that Value (0)=0 for the Reference Point taken at outcome 0 ” . This Relative aspect of Value was revolutionary.
However, Kahneman himself acknowledged further improvement in that due to some conflict in some practical cases related to the assumption of the absolute Reference point at 0.
I have recently proposed “Relativistic Prospect Theory” as an extension of Kahneman and Tversky’s Prospect theory to address those fundamental limitations related to Value and Reference Point Relative Dynamics mentioned earlier in the Human Mind Behavioural Psychological Context – This is under discussions with relevant global experts of the field.
Reference Point is NOT absolute at outcome 0. Rather Even the Reference point keeps changing relatively dynamically in human mind psycho-scientifically. And Value v(0) for outcome 0 can have different values depending on Reference point k which has its dynamics rather than always static fixed at the outcome 0.
Value function for the Human Psychological Mind seems to follow the Ornstein Uhlenbeck type mean-reverting Stochastic process and even Reference point has own dynamics that also follow such mathematical process.
Happiness is when V(x>k) >0 and Pain is when V(x<k) < 0 and V(k) = 0 for Reference point k where the Reference point keeps on changing relatively for a human mind observer...
d〖v(x)〗_t=a(b_t-〖v(x)〗_t )dt+σdW_t
b_tis the mean equilibrium level value of v(x)which is 0 where W_t is the Wiener process. Other symbols are the parameters. It reveals that Value does have some Randomness component too.
v(x>k)>0 denotes happiness /gain and
v(x<k)<0 denotes pain /loss.
v(x=k)=0 for the reference point k.
There have been many real-life practical examples to validate the above.
This also has Spiritual significance in that Happiness and Pain co-exist together and mean revert in the cycle. No matter what one achieves or loses in life, its value mean reverts to normal equilibrium value over time as the Reference Point keeps on changing in human mind behaviour psychologically to return to equilibrium least energy most stable Quantum behavioural energy state neurologically in human minds.
Hence, Scientifically and Mathematically, the Key to Happiness is to manage one’s reference point relative to one’s achievement (positive or negative )rather than increasing one’s reference point endlessly, which would cause pain no matter how much Absolute one achieves. Even Minds automatically adjust them passively and some conscious effort is also indeed at the individual active level.
This is also in Spiritual relevance where it’s often stated
संतोषम परम् सुखम।
This technically means to set one’s Reference point under check so as to generate Relative Value and Happiness even if achievement is constrained, or low. Relativity matters technically not absolute..So no matter how much one achieves even economically, financially in the absolute sense but if the Reference point is not kept under control, it would lead to discontent and pain!
So, based on our ancient Spiritual richness and heritage our focus should be to achieve GDP at higher Happiness /Lowest Stress level by managing one’s reference point. Unlike many economies particularly Capitalistic ones, that focus on maximizing GDP, it may not increase happiness levels if the Reference point not correct for its citizens’ psychological mind at local personal level.
Psychologically, Reference Point is Relatively decided having prominent component of people and ssurrounding around them comparatively. Happiness in human mind is psychologically wrt others in the surrounding also that helps in figuring out the Reference point for an observer human mind scientifically. As often generally said , one becomes the mean of 10 people surrounding them.
Hence Relative Equality in the vicinity matters a lot as that also plays prominent role in deciding Reference point in people’ minds at large in general.
Hence Happiness originating from Reference point comes from Value which is Relative wrt Reference point rather Absolute ..The point is Absolute Income ,GDP etc doesn’t necessarily increase Value and hence Happiness rather It’s relative !
So, one must focus on Relatively rather only Absolute increment of Income,GDP etc.. for overall Happiness of People in an economy... It seems the economies focus on maximize GDP more and more in absolute terms assuming absoluteness leads to Psychological Betterment of People linearly. But that might not be the case in reality always in technical sense.
In Financial Investment, it’s often focussed on Return- Risk e.g. Sharpe Ratio and other ratios but ultimately it comes to Investors’ emotional psychological well being too and that comes not necessarily from absolute high Return-Risk ratio but relatively and hence How much Stress has been involved in achieving that...Like Two same Risk-Return generated at different level of Stress/Happiness level would have different Values for a Human Human Mind Psychologically...
Psychological mindfulness or investors is extremely important as Stress leads to so many health and life risks these days globally. It’s like Tail risk.
So, Stress Adjusted Risk-Return tries to figure out How much Stress has been taken to achieve a particular Risk-Return relatively. That’s ultimately important for overall behavioral mindfulness of stakeholders involved e.g. investors, people, fund managers etc.
Say for example : Stress Adjusted Share Ratio i.e. Sharpe Ratio generated per unit of Stress level relatively. So, if A generates say Stress Adjusted Sharpe Ratio of 3 while B is 2 so A is better than B other things being the same.
Similarly if A generates 20% return at higher stress level of say 5 units and B generates 20% level at stress level of say 10 units so, Stress Adjusted Return in the investment A is greater than B for an investor’s overall mindfulness.
(Stress Adjusted Risk-Return)SARR= (Risk-Adjusted Return( RR)e.g. Sharpe Ratio)/( Stress Level Scale Imvolved(S))
Similarly Stress Adjusted GDP (or Happiness Adjusted GDP) for an economy and similarly for GDP per capita
= GDP/(Stress or Happiness Level overall of people to achieve the above)
Similarly if let’s say there are two Economies A and B.
A has GDP of $ 10 trillion at Happiness Level of 20 and B has $ 10 trillion at Happiness level of 10 them overall Happiness Adjusted GDP for A is greater than that of B. It’s important because ultimately Higher absolute GDP of an economy doesn’t matter rather at what level of Happiness that GDP has been achieved matters ultimately for Psychological well-being of the people at large. Just like Income generated at higher stress levels doesn’t lead to overlap Happiness level of the people in the true sense.
In a nutshell, Higher Income, Higher Return, and Higher GDP don’t necessarily mean Higher Value in true sense and Higher Happiness level. As explained above, Value is technically a Relative concept having scientific psychological dynamics in human minds. So, ultimately Relative aspects matter wrt. Reference Point of People. So, People generally are more happy by relative superiority than absolute figures.
Hence how much equality exists in the vicinity has an important role in the psychological Reference point dynamics of human minds. So, the focus, in my humble scientific psychological behavioural view, is not just trying to maximize GDP but Happiness Adjusted GDP, ultimately that matters. It doesn’t matter if we achieve a huge absolute GDP and the Stress level of People extremely High i.e. Lowest Happiness Level. One can empirically see US or China, despite having the highest absolute GDPs or some countries having the highest GDP/Capita e.g. Luxembourg, Singapore, Norway, etc.. are not necessarily the Happiest Economies in the world. Lower/ Higher absolute GDP country or GDP/ Capita can have higher / lower Happiness Adjusted GDP or GDP/ Capita!
It’s quite important because Stress, Anxiety, etc. are becoming serious issues globally leading to possible disastrous health risks for humanity. It also has Spiritual Significance as our Holy Religious Scriptures teach us. So, many Spiritual teachings and principles do have in-depth Scientific principles behind them, brought to us by our great ancient sages. Though this is not the focus here but many Spiritual aspects are deeply scientific!
India/Bharat, our motherland, has a rich historical spiritual inclination, We should not blindly follow what other Capitalistic Economies try to blindly maximize absolute GDP or GDP Per Capita rather we must focus on Happiness Adjusted GDP for overall common people’s mindfulness well well-being aligned with our Spiritual Historical glory!
In fact it’s applicable to all the economies, companies, etc.. in general, and all should think that way. UN SDG seems to start focussing on them.
By the way, it’s important to mention the Happiness Score generating methodology by Gallup ,World Happiness Rating methodologies do have serious limitations from the Statistical point of view and some important psychological aspects are also seriously missing. This needs to be modified technically to measure the Happiness level in an economy in a prudent way. Statistical Sampling and tools and long-standing paradoxes have some fundamental issues that also affect the multi-trillion dollar investment domain as well as economic and social analysis. It has also been my ongoing research focus along with globally renowned collaborators in the field of Statistical data analysis in Financial /Economics Investment and Risk Management. There do exist some foundational limitations in conventional Statistical and Data methods. How some serious long-standing paradoxes can have serious implication issues in our real day-to-day life cases across the fields. That’s an in-depth area in itself to discuss.
So, concluding the brief description here, our focus must be on Stress /Happiness Adjusted GDP , GDP/Capita keeping alignment with Psycho Scientific dynamics of People’s mindfulness that is also aligned with the glorious Spiritual Principles of our economy and ultimately all the countries would come down to that hopefully.
