A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Piper, Alan T. Working Paper Optimism, pessimism and life satisfaction: An empirical investigation SOEPpapers on Multidisciplinary Panel Data Research, No. 1027 Provided in Cooperation with: German Institute for Economic Research (DIW Berlin) Suggested Citation: Piper, Alan T. (2019) : Optimism, pessimism and life satisfaction: An empirical investigation, SOEPpapers on Multidisciplinary Panel Data Research, No. 1027, Deutsches Institut für Wirtschaftsforschung (DIW), Berlin This Version is available at: http://hdl.handle.net/10419/195177 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Research disseminated by DIW Berlin may include views on public policy issues, but the institute itself takes no institutional policy positions. The SOEPpapers are available at http://www.diw.de/soeppapers Editors: Jan Goebel (Spatial Economics) Stefan Liebig (Sociology) David Richter (Psychology) Carsten Schröder (Public Economics) Jürgen Schupp (Sociology) Conchita D’Ambrosio (Public Economics, DIW Research Fellow) Denis Gerstorf (Psychology, DIW Research Fellow) Elke Holst (Gender Studies, DIW Research Director) Martin Kroh (Political Science, Survey Methodology) Jörg-Peter Schräpler (Survey Methodology, DIW Research Fellow) Thomas Siedler (Empirical Economics, DIW Research Fellow) C. Katharina Spieß (Education and Family Economics) Gert G. Wagner (Social Sciences) ISSN: 1864-6689 (online) German Socio-Economic Panel (SOEP) DIW Berlin Mohrenstrasse 58 10117 Berlin, Germany Contact: [email protected] Optimism, pessimism and life satisfaction: an empirical investigation Alan Piper* This version: February 2019 Abstract: This empirical investigation into life satisfaction, using nationally representative German panel data, finds a substantial association with an individual’s thoughts about the future, whether they are optimistic or pessimistic about it. Furthermore, including individuals’ optimism and pessimism about the future substantially increases the explanatory power of standard life satisfaction models. The thoughts that individuals have about the future contribute substantially to their current life satisfaction. In particular, the reduction in life satisfaction experienced by individuals who report being pessimistic is greater than that for well-understood negative events like unemployment. These effects are attenuated but remain substantial after controlling for individual fixed effects, statistically matching on observable variables between optimistic and pessimistic individuals, and addressing the potential endogeneity of optimism and pessimism to life satisfaction. Moreover, these effects are robust to controlling for future life events that may be anticipated. Key Words: Life Satisfaction; Subjective Well-Being; Mental Health; Entropy Balancing; GMM; Dynamics; Endogeneity; SOEP JEL codes: C23, D84, I31 * E-mail address: [email protected]. Europa-Universität Flensburg Internationales Institut für Management und ökonomische Bildung Munketoft 3B, 24937 Flensburg, Deutschland. I am grateful to Amina Ahmed Lahsen and Geoff Pugh for useful comments. This article has also benefitted from comments from seminar audiences at the Europa-Universität Flensburg and German Institute for Economic Research (DIW) in Berlin. The German data used were made available by the German Socio-Economic Panel Study (SOEP) at the DIW Berlin. Neither the original collectors of the data nor the Archive bear any responsibility for the analyses or interpretations presented here. 1 Optimism, pessimism and life satisfaction: an empirical investigation “Damn right, I like the life I live Because I went from negative to positive And it’s all good.” The Notorious B.I.G., Juicy 1. Introduction Within the economics discipline, many investigations into well-being focus on objective factors (income, labour force status, marital status, education, health) and, in many cases, have convincingly demonstrated associations and, causal connections. Investigations considering subjective factors are rarer, although also important for individual well-being and life satisfaction. The well-known study of Winkelmann and Winkelmann (1998), for example, demonstrated that much of the loss of life satisfaction from entering unemployment was non- pecuniary, and some of these non-pecuniary factors were subjective (for example self- esteem, feelings of loneliness and a lack of purpose). For other studies of subjective factors and well-being see Baumeister et al. (2003) and Ho et al. (2010). The meaning of happiness itself may be subject to different subjective feelings. Over the lifecycle Mogliner et al. (2011) find differing meanings for happiness, notably excitement for young people, and a sense of peace for the not so young. The inclusion of, or controlling for, subjective states and factors may even enhance collective understanding of how objective factors are related to well- being. The study is an investigation of a subjective factor: the association of what individuals think about the future – whether they are optimistic or pessimistic – and their life satisfaction now. Using nationally representative German panel data, evidence is presented that people who 2 are pessimistic about the future, compared with people who are quite optimistic, are much less satisfied with life. Conversely, there is a life satisfaction premium associated with feeling optimistic about the future compared to being merely quite optimistic. Clearly, the thoughts that an individual has about the future are important for current life satisfaction; moreover, including a measure of an individual’s thoughts about the future substantially increases the explanatory power of well-being models. This empirical investigation uses four methods to establish this result: ordinary least squares (OLS); fixed effects (FE); System General Method of Moments; and FE following the entropy balancing procedure. All four methods point to the same result: a substantial relationship between what individuals think about the future and their satisfaction with their life. In finding this result, this investigation confirms and extends previous similar findings. For example, Becchetti et al. (2012) investigate life satisfaction via eleven sub-components and find that answers to the question “How often do you look forward to another day?” are an important contributor to an understanding of well-being. Senik (2008) uses Russian Panel data to link life satisfaction to an individual’s expectations about whether they and their family will live better in the next twelve months. These results just mentioned, including those of this investigation, suggest that individuals’ thoughts about the future should be more widely considered in well-being investigations than they are now; the resulting increase in explanatory power over “standard” well-being equations can approach 40%. Such thoughts