Rationality and Happiness

Rationality and Happiness

Sam Choon Yin (2003)



             There is a growing interest among economists in studying human behavior. Increasing recognition has been given to individuals who actively study those issues related to human behavior. The Nobel Prize winners for Economics Science in 2002, Professor Vernon L. Smith, an experimental economists, from the George Mason University and Professor Daniel Kahneman, a psychologists from the Princeton University, were awarded for their contributions relating to the area of human decision-making. One issue on human behavior that has captured the hearts of many well-known economists, including Amartya Sen, Richard A. Easterlin, Bruno Frey, Ng Yew Kwang, Robert Frank and Tibor Scitovsky, is the perception of happiness. Some recent books have been published on this subject. One such book is ‘Happiness in Economics’ edited by Richard A. Easterlin, and published in 2002 by Edward Elgar, containing a collection of economics essays on happiness. Another recent book on this topic is ‘Happiness and Economics: How the economy and institutions affect human well-being’ by Bruno S. Frey and Alois Stutzer published in 2002 by the Princeton University Press. In this essay, I will discuss the link the concept of rationality and happiness, with the latter being a dynamic concept revolving over time. How the nature and level of happiness differ over time depends essentially on three factors, namely, culture, institutions and the ability of one to pursue his or her dreams. Each of the three factors is discussed in some details.



            It may be useful to begin with the concept of rationality. Rationality is a commonly used concept in social sciences to describe the behavior of individuals. A person is considered rational if he or she considers every alternative available to him or her in solving problems. A rationale person assesses the costs and benefits of each of the options, and chooses the alternative that yields the highest net benefits. It is a common perception that a rationale person is synonymous to a self-interested person who makes decisions to maximize his or her interest. This is wrong. A rational person is not necessarily egoistic. One should recognize that understanding what goes into the minds of the individuals is difficult and usually unknown to the outsiders. No one is able to read a person’s mind in an accurate sense. It is not correct to claim that everyone is egoistic. It is possible for an individual to consider the interests of others when making decisions. A person could be altruistic such that the alternative that the person will choose is one that yields the highest net benefits to the other individuals rather than one that maximizes his or her interest. Or the person may be utilitarian such that the alternative chosen is one that yields the highest net benefits for the largest number of people. Of course, one could not deny that there are egoistic individuals in which case, the alternative chosen is one that yields the highest net benefits to him or her. What I am trying to say here is that the notion of rationality is more appropriately linked to the process of thinking rather than being a concept which predetermined the nature of the person. A rationale person can be equally likely to be one that is utilitarian or altruistic, not necessarily an egoistic person.



This brings me to the point that assessing individuals’ perceptions towards happiness is subjective. What makes one happy is subjective. An individual may respond to higher income as an important factor contributing to his or her happiness. One may find it sufficient to have the necessary basic needs like food, shelter and clothing. Higher income is not necessary but freedom to spend one’s time on things that he or she likes is essential to make the individual happy. One may link happiness to the ability to exercise choices. In this sense, happiness is associated to freedom and the acquisition of knowledge and good health. The provision of education opportunities and health care at reasonable costs then represents an important policy in raising the individuals’ level of happiness. How the individual assesses the alternatives, imputes the costs and benefits of the alternatives and ranks them when making decisions is unknown to the outsiders, except for the person in consideration. One may see committing crimes as an activity that brings joy to him or her. Or one may see the idea of reading a book as a more constructive way of spending the free time than say traveling. Each of the alternatives would have been assessed by the individuals to see which one yields the largest net benefits.

What is important is how the individual weighs the costs and benefits. While what goes on in the ranking process is not possible to be known to an outsider, it is possible at least to influence to some degree the choices that the individual would make. This is achieved through influencing the costs and benefits equations of the alternatives. There are implications to this. The government can introduce policies to affect the costs and benefits equations so as to increase the probability of the individuals in selecting the alternative that is socially desirable. Likewise, in the business world, the shareholders through the boards could see what are some of the possible ways they would introduce to align the interests of the executive directors and their subordinates to the interest of the shareholders. There are three issues which one could look into; culture, institutions and ability of the individuals in pursuing things that would enhance their happiness. Happiness is a dynamic concept, evolving and changing over time depending on the cultural development, institutional change as well as changes in the ability of the individuals to pursue their dreams say as a result of changes in the level of technology and income.



Culture represents the beliefs and values possessed by the individuals. Essentially, the culture is deemed as the unwritten rules directing the preferences and choices made. Because of the stronger cultural preference, one may place a greater preference in education as the believer of the Confucianism school of though would. Examples include residents in Korea, Taiwan, Hong Kong, China and Singapore where Chinese tend to be the dominant ethnic group. Some, on the other hand, may have a greater preference towards leisure. Being relatively more shortsighted, these individuals are happier to spend their free time on leisure rather than on education. The Thais belong to such group. There is nothing wrong with this. It is simply a matter of perception on what makes an individual happy. To a Singaporean, spending his or her leisure time on education may make him happier while a Thai may see traveling or shopping as relatively more important. Consider another example. Females in countries like Singapore and Hong Kong are more likely to enter the labor force. Their culture permits them to engage in the working environment as a means to attain a better standard of living. It is a choice deemed appropriate given the economic and cultural conditions prevailing in these countries. This is on contrast to countries like Japan where females are less likely to participate in the labor force. They are happier to work at home. This is interesting given the fact that both Japan and Singapore have more or less the same economic features. The difference therefore has to be attributed to cultural factor. The fact that less Japanese females are engaged in the workforce must be attributed to a great extent to the cultural setting in the Japanese system, which differs from that of Singapore. It is perfectly rationale for the Japanese females or the Singapore females to behave in their respective manners. The idea of happiness differs between the two countries and the difference is explained by the differences in the cultural settings.

Can cultural settings be altered? I believe they can. In Malaysia, the government launched the ‘Look East Policy’ in 1981 as an attempt to influence the way things were done in Malaysia. Malaysians were encouraged to emulate the Japanese, Koreans and Taiwanese whom were touted to possess positive values which would be beneficial to Malaysia’s economic development. Examples of such virtues are hardworking, diligence in the work, efficient and loyal. Malaysian Prime Minister Dr. Mahathir bin Mohamad, who advocated the policy, is still in favor of the east over the western values as exemplified in his recent writings. Singapore had done the similar thing. In the 1980s, Lee Kuan Yew encouraged companies and the employees in Singapore to learn more about the corporate culture and management practices in Japanese companies. In a bolder attempt, the Singapore government had also tried inculcating the positive cultural values through the religious knowledge lessons introduced in 1982. Students in the secondary schools were required to study one of the religious lessons including Bible Knowledge, Buddhist studies, Islamic studies, Indian ethos and Confucianism ethics. Because of the fear that such lessons would create inter-religion conflicts, the program was eventually phased out in 1990. In another example, the People’s Action Party (PAP) in Singapore introduced the ‘Shared Values’ principles in 1989, in an attempt to cultivate positive cultural values among its people. Based mainly on the communitarian framework, the values promoted include, placing the nation before community and society above self, to treat the family as the basic unit of society, to regard and community support for the individual, to see the importance of consensus instead of contention, and to maintain racial and religious harmony.

Such good practices can be considered as something like goods and services. To raise the demand for the values requires the state to promote their benefits so that the people are more aware of the values. With the awareness, it becomes more likely for the individuals to incorporate the values into the decision-making process. They would consider these values as part of the alternatives available to them when they make decisions. Besides advertising, the state could engage in the promotional strategy. Promoting the values aims to raise the people’s demand towards the values to some level desirable from the government’s point of view. The intention is to raise the perceived benefits of inculcating the values therefore increasing the chances for a rationale individual in taking up the alternative relating to the positive values. Clearly, the governments must have felt that the values can be inculcated over time therefore justifying their efforts to influence the minds of the people. While the state will play a critical role in altering the preferences and behavior of the citizens, it should be recognized that the family remains the most crucial player dictating the thoughts, preferences and choice of actions of the people. One cannot live alone in isolation. To reap a fruitful life, it is essential for the person to live in groups. The initial stage involves leaving with the family then friends followed by the workplace and the state. The values possessed by an individual are initially shaped via their relationships and interactions with the family members. The elders set the examples. Usually, what is perceived as acceptable or unacceptable is set in the minds of the individuals through the examples shaped by the elders. The perceived happiness in engaging in activities like smoking, alcohol consumption, gambling, relationship with the opposite gender, studying and others, are formed in the initial stage. To raise the chances of one to do the moral thing requires the family members to expound the correct values to the younger generations.

In the attempt to pursue happiness, however defined, individuals may engage in activities that go against the social norms. It is possible for the individuals to engage in such activities because their behaviors can be influenced (to some extent) by external cultures. Even if one’s behavioral patterns or physical outlook are static in the biological sense (say inheritances from parents and genetic formulation), there is the element of variation that co-exist allowing the individuals behavior and physical outlook to vary over time. The latter could be a result of exposures to the other side of the world or even a result of combination of genes from parents of different culture from a biological sense. An example is the powerful western culture that many youths in Singapore and many other parts of the non-western world have grown in favor of mimicking particularly due to their exposure to the western world through the entertainment industry. Fearing that the youths in their countries would indulge in bad western values like demonstration and violent, Mahathir in Malaysia and Lee Kuan Yew in Singapore had openly asked their residents not to forget their own roots and refrain from being corrupted by the negative western culture. Mahathir wrote about the western values, ‘Materialism, sensual gratification, and selfishness are rife. The community has given way to the individual and his desires. The inevitable consequences has been the breakdown of established institutions and diminished respect for marriage, family values, elders, and important customs, conventions, and traditions. These have been replaced by a new set of values based largely on the rejection of all that relates to spiritual faith and communal life’ (Mahathir and Shintaro, 1995, p. 60). On the western perception of family values, he commented, ‘I believe that a lifestyle rooted in family and friends is the key. I have had occasion to discuss the family at length with Westerners. Many say two men living together is a family, two women living together is a family, an unmarried woman and her child are a family. To Asians, those are not families. A family exists when a man and a woman are joined in marriage and have children. The Western redefinition of the family is totally unacceptable’ (Mahathir and Shintaro, 1995, p. 85). Lee Kuan Yew had warned Singapore and developing countries on the danger of imitating the way things were done in the West when he said in 1971, ‘..people in new countries cannot afford to imitate the fads and fetishes of the contemporary west. The strange behavior of demonstration and violence-prone young men and women in wealthy American, seen on TV and the newspapers, are not relevant to the social and economic circumstances of new underdeveloped countries’ (Speech made to the General Assembly of the International Press Institute at Helsinki, 9 June 1971, p. 175). All these evidences suggest that cultural settings can be altered and governments in Malaysia and Singapore had attempted to influence it. This in turn suggests that it is possible to influence the nature and level of happiness.



            Douglas North, in his book ‘Institutions, Institutional Change and Economic Performance’, written in 1990, defined institutions as ‘the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction’ (p. 3). North further classified institutions into formal and informal where the former includes the rules that human devise and the latter includes conventions and code of behavior that dictates how human beings behave and interact with one another. It should be noted that there is a difference between informal institutions and cultural values. As Yoshihara Kunio explained, ‘They (informal institutions and culture) are the different sides of the same coin. For example, the unwritten code of behavior in a society is an informal institution, but when it is imbibed by people, it forms part of culture, being written on their minds’ (Kunio, 2000, p. 209). To be part of the culture therefore, the code must be action-oriented.

            It is reasonable to assume that individuals have limited information when making decisions. This could be either due to the fact that the information is not available at all for the individuals to use or that the information has to be acquired at a very high price (either monetarily or non-monetarily). Even if the information is available, the individuals may not be able to make use of the information effectively simply because one’s computational power is limited. As a result, it appears that it is more reasonable to state that individuals are bounded rationale and be contented with the second-best choice. The establishment of institutions helps to minimize uncertainties in human interactions and decision-making. The institutions define the rules and regulations in dictating the acceptability and non-acceptability of the actions. For example, the rules defining property rights, give individuals the assurance that their properties would be protected therefore allowing them to reap the surpluses resulted and prohibiting others from encroaching to the rights that he or she is entitled to. Obviously, protecting one’s property enhances his or her level of happiness. Assuming that the rules are enforced, the individuals would then have more incentive to pursue his or her own interests to further raise the level of happiness knowing that whatever gains reaped would be protected.

The institutions act as guidance to one’s behavior. An individual usually faces many possible choices of which some of bad and some are good from the society’s perspective. Rules stipulated within the society, either formally or informally, provides a guidance to the individuals in determining the moral action to act upon taking into consideration the acceptability and non-acceptability of the various choices of actions. The benefits proper institutions bring to the society is that individuals’ choices are likely to become more refined and guided in the sense that more positive values, as defined by the society, would enter the choice set of the individuals. This would enhance the probability for the individuals to choose the alternative that is socially acceptable. Therefore, what goes into the utility function in determining one’s level of happiness is dictated to some extent to the kind of formal and informal rules defined in the society.

Such rules may differ from the cultural perspective or dependent on the kind of economic system adopted in the nation. Consider the former case. An individual could face the limitation in raising his or her level of happiness if the behavior is somewhat dictated by the cultural values. In Singapore for example, the life of the youths has been very focused on excellence in education for it has become a socially acceptable norm for the youths to study hard, compete fiercely with their fellow schoolmates and excel in the examinations. One’s life therefore is constrained by social norm to such an extent that it deprives the individuals from engaging in activities that really make them happy. On a more positive note, one can give credit to the society norm in dictating the actions of the individuals. An example is the act of corruption, which is relatively minute in Singapore as compared to other countries in the developing world, thanks particularly to the role of government in its constant effort to downgrade corruption acts and highlight the importance of having a clean and honest government for the sake of Singapore’s survival. It has become a social norm in Singapore to act incorrupt in both the public and private sectors such that any one who is found guilty of committing the act is socially condemned. This has created a sense fear (or unhappiness) among the residents in Singapore in committing the corruption act. 

Formal rules can be in the form defined according to the economic system. It is useful to note that rules and regulations exist regardless of the kind of economic system adopted. Only the nature of the rules differs. In the free market system, the rules are basically in favor of freedom given to the economic agents in allocating their resources and pursuing their own interest. The free market economy is also relatively more tolerant to income inequality within the nation. The planned economy on the other hand contains rules that give power to the governments in allocating the nation’s resources with a strong emphasis in equal distribution of income within the residents of the nation. A more realistic form of economic system is that of the mixed economy, which contains rules like the one advocated in the free market system, that is, favoring freedom in production and consumption over authoritative rule. Producers have the freedom to set prices and decide the kind of goods that they want to produce. Consumers are free to allocate their income in any manner they prefer. Both the producers’ and consumers’ choices however are subject to the constraint (as defined by the society, represented by the government) defining whether their choices are socially acceptable or otherwise. In any system, one’s behavior and his or her ability to enhance the level of happiness are therefore dictated by the formal rules. One who gets satisfaction from driving fast on the road faces the constraint from the rules of the road, which forbids his or her action. One who feels happy when lighting up a cigarette in an air-conditioned restaurant is constraint from doing so because the formal rules (at least in Singapore) disallow such action from taking place.

It should be noted that the overall effect of formal rules on individuals’ happiness is hard to ascertained. Formal rules affect the benefits and costs equations of the alternatives facing the individuals when they make choices. One may be relatively more well off with the imposition of the formal rules while some may end up worse off. For example, enforcement of patents provides protection to the innovators therefore raising their benefits in engaging in researches while increases the costs of the potential imitators to imitate the innovation without contributing to its creation. The former then becomes relatively happier with the protection at the expense of the latter. Consider another example. It is easy to see that properly enforced formal rules helps to minimize the cost of transforming the inputs to the final output. While the individuals still need to spend money in writing the contractual agreements, the level of uncertainty as to whether the other party would default without any compensation has greatly reduced. What’s more important perhaps is the increasing demand around the world for proper formal rules to be in placed in monitoring and enforcing agreements between two or more parties. This could be seen in the case of Thailand where prior to the Asian financial crisis, the lenders were not very well protected in the event that the borrowers default in the loans. This had made the lenders vulnerable to the crisis since they were unable to obtain the loans that they had given to the borrowers. The situation has since been rectified with the revision and strengthening of the bankruptcy law. The formal rules minimizes the transaction costs related to uncertainties. This also applies to China. Its effort to integrate with the external world has forced China to enforce the intellectual property rights of the innovators although it would take some time before any concrete results are shown. Also in China, there is a higher demand among the local residents for the government to impose regulations recognizing their rights in matters relating to retrenchment of workers (there were cases where the workers were asked to leave without prior notices) and closure of schools. Proper formal rules helps to minimize the cost of transaction leading to greater satisfaction to the individuals at least on a net basis. However, it is important that the formal rules are properly enforced and administered. It is possible that the transaction costs may be higher with the formal rules than without if the participants are required to bribe the government officers to get things done. Or the paper work involved is so substantial that it has become destructive to go through the legal channel. In this case, the people may be happier to do without formal rules. Continuing the function of the formal rules under such scenario would only lead to the thriving of the underground economy.

In the private sector, the organizations play the role of setting the institutions in guiding the behavior of the agents working in the organizations. Formal rules can come in the written form to align the interest of the agents with that of the principals. They are rules that are relatively clear and easier to follow. The informal rules are relatively more complicated in the sense that they are usually unwritten. They are usually passed over from one generation to another, typically initiated by the founder of the organization or some strong organizational leaders like Jack Welch and Bill Gates.

What I have tried to show in this section is that one’s happiness is dictated by the kind of institutions that are established in the society either formally or informally. Provided that the institutions are enforced and properly set up, the free-will behavior would be constraint to some extent therefore affecting one’s level of happiness either positively or negatively depending on whether one is the victim of the rulings or the beneficiary from the enactment of such rules. The success of the institutions depends on the quality of the setters, the government in the public sector and the organizations in the private sector. This is true for the establishment of both the formal and informal rules. The quality of the government and the organizations is therefore critical to see whether one’s happiness is really improved with the institutions.



            So far, the discussion focuses on the question relating to the availability of freedom to pursue happiness. The cultural issue defines the social norms on what is acceptable and non-acceptable from the cultural perspective. The institutions focus on the formal and informal rules guiding the behavior of the individuals. Because of the formal and informal rules, some actions may not be permitted from the society’s point of view therefore hindering the individuals from engaging in certain actions even when such actions enhances their level of happiness. The next issue I would to look into pertains to the ability of one to pursue the choices available to him or her. This is an important topic to look at. Even if one has the freedom to pursue the events leading to greater happiness, it may not be accessible to the individual simply because he or she does not have the necessary income to take up the necessary action. Or, a person may be physically disabled to engage in activities that would make him or her happier even there is the opportunity for the individuals to take up the necessary tasks. There is therefore a distinction between ‘freedom from pursuing happiness’ and ‘freedom to pursue happiness’. For example, the availability of opportunities to own a car and to further one’s education may enhance one’s level of happiness but whether it is realized depends on the ability of the individual in taking up the advantages. He or she may not be able to afford to buy a car to pay the necessary fees to take up the courses at the college therefore rendering his or her happiness hanging in the air and not realized.

The above simply recognizes the fact that ability matters. Resources for example are needed to enable one to pursue happiness. A rationale individual who ranks his or her alternatives must consider his or her ability in pursuing the alternative. A first ranked alternative might not be taken up eventually because of the individual is unable to take-up the tasks associated with the option. Linking rationality and happiness is therefore incomplete without taking into consideration the issue on ‘ability’. What is important in this case is for the relevant institutions (like the government and organizations) to provide the necessary resources to enhance the individuals’ abilities to pursue their interests. Opportunities can be made available for the individuals to tap on their capabilities so that, over time and with efforts put in from both parties, the individuals could enhance their level of happiness. Eventually, the institutions would benefit for happiness could easily translate to higher productivity.  Examples of the initiatives that can be carried out by the government are provisions of health care and educational facilities. Individuals should be physically healthy to be able to pursue their dreams. Likewise, opportunities to acquire knowledge enable one to understand things around him or her better therefore raising the probability of survival. On this note, it may be useful to note that some knowledge cannot be mastered regardless of the amount of reading that one does. ‘Sport events’ is one example. In the game of table tennis for example, one cannot master the game just by reading about it. Even with constant practices, there will be someone who is better. Known as tacit knowledge, such knowledge is innate within a person and it basically limits the ability of one to fully take advantage of the opportunities to enhance his or her happiness. The individuals are also generally more satisfied in the environment where the real earnings are not declining. It is essential for the relevant parties in this case to at least maintain the real earnings of the individuals. Issues relating to governing wages, prices and employment both in the public and private sectors become pertinent. The other relevant point relates to the level of technology. Improvements in technology, ceteris paribus, facilitate the attainment of the first-ranked option therefore raising the probability of increasing one’s level of happiness.



             This essay represents a humble attempt to relate the concept of rationality and happiness. It first examines the meaning of rationality, highlighting that it is not necessary to relate rationality to the notion of egoistic. It is equally likely for a rationale person to be altruistic or utilitarian. A rationale person is defined simply as one who considers all possible alternatives available to him or her in solving a problem, one that assesses the costs and benefits of each alternative and then chooses the alternative that yields the highest net benefit. The essay then moves on to examine the concept of happiness, which, like the rationality concept, is difficult to predict in reality. One may relate happiness to income, or leisure or other means depending on the culture (which affect the person’s preferences), the institutions (both formal and informal) and the ability of the individual in taking advantage of the opportunity to maximize his or her happiness. It is logical then to consider each of the contributing factors to happiness.

The essay noted that the institutional structure is essential in defining the dos and don’ts as perceived by the society either formally through rules and regulations or informally via code of conduct. The institutions alter the benefits and costs equations of the alternatives of the choice sets faced by the individuals. For example, rules to protect the property rights of the individuals increase the chance for the individuals to conduct research and developments related activities. Not all participants are in favor of more formal rules because they usually result in higher transaction costs albeit in different nature. In some countries like Thailand and China, the formal rules are deemed undesirable (at least in the past) for they raise the costs of transactions like lawyer fees to write contracts and other agency fees. Transactions, in these countries, are based more on trust rather than through formal means. The demand for institutions therefore, depends on how the participants see the pros and cons of having institutions. However, as the nations around the world become more integrated, it is essential for the nations to establish the necessary formal rules to minimize the risks and uncertainties involved in transactions. Relying merely on trust has problems particularly in the case where one of the parties defaults in the ‘agreement’ as exemplified in Thailand during the Asian financial crisis. However, it would be na´ve to ignore cultural values completely. It definitely helps in the transaction for the players involved to trust one another so that things can be done more efficiently. A combination of both approaches therefore is recommended to maximize the satisfaction of the parties involved in the transactions. That is, formal rules should be assisted or supplemented by cultural values to see that the transactions are conducted efficiently and effectively. The latter could be established for instance through the reputation of the parties involved or conventions emerged from repetitive transactions. Proper cultivation of the positive values and establishment of institutions raise the probability for the individuals to pursue their respective alternatives that maximize their happiness. Having the opportunities to participate in the best alternative is necessary but not sufficient to ensure that the perceived net benefits associated with the option are realized. It is important to recognize the ability of the individuals in tapping on the alternative to realize the benefits. If the individual concerned does not have the necessary abilities to take up the option, either because he or she is financially incapable or physically incapable or for whatever reason, then the individual’s perceived happiness would not be realized. Of course, it is in the interest of the individual to have the capability in taking up the best alternative so as to allow him or her to reap the perceived net benefits and therefore increasing his or her level of happiness.



1.         Easterlin, Richard, A. (2002) ‘Happiness in Economics’, Edward Elgar (Great Britain).

2.         Frey, Bruno, S. and Stutzer, Alois (2002) ‘Happiness and Economics: How the economy and institutions affect human well-being’, Princeton University Press (United States).

3.         Kunio, Yoshihara (2000) ‘Asia per capita: why national incomes differ in East Asia’, Curzon Press (Singapore).

4.         Mahathir Mohamad and Shintaro Ishihara (1995) ‘The voice of Asia: two leaders discuss the coming century’, Kodansha International (Tokyo).

5.         North, Douglas, C. (1990) ‘Institutions, institutional change and economic performance’, Cambridge University Press (United States).