1. The Economic Consequences of Despair Rowena Pecchenino Maynooth University Department of Economics, Finance & Accounting National University of Ireland Maynooth Irish Economics and Psychology Conference 31 October 2014

2. Outline Defining despair Juxtaposing despair with hope Modeling despair Decisions in despair The challenge of despair 6 September 2014 ASREC European Conference 2

3. Defining Despair St. Paul and early Church scholars In medieval church, state and art Aquinas, Luther and Calvin Kierkegaard Marcel and Steinbock Nesse Frank, Clarke and Kissane 3

4. Themes Despair is a social malady – Exclusion from society – Difficult to re-enter society – Not bound by society’s conventions – Social relationships difficult/impossible Despair robs the individual of his ability to cope, to act Life loses its value and meaning 4

5. Despair vs Hope Hope is about possibility, despair is about impossibility Hope is about defining and achieving goals, despair is about loss of goals and the means of achieving them Hope is about the future, despair is about the loss of that future 5

6. Modelling Despair The standard model of intertemporal decision making: – Rational, utility maximizing individual – Intertemporal preferences defined over consumption profiles from an initial date t to a terminal date T – Utility function is time separable – The rate at which the future is discounted is constant Essential: agents optimize as of the initial date, follow their optimal plan, and reoptimize if there is an unanticipated change to their budget/choice sets 6

7. When there is no tomorrow Hyperbolic discounting – with the weight on the future going to zero Contraction of budget set No future to plan for, no resources to pursue any plans The agent’s world collapses 7

8. Goals/Identities, I Goal oriented preferences Assume – Utility is a function of his n=1, …, N goals, g n, relative to its ideal, g n*, that is, g n – g n*, for all n. – U n (…, g n – g n*,…) > 0 ( 0), for all n = 1,…,N and that U nn  0 for all n = 1,…,N. – The sign of U nm n  m is positive if his n and m goals are complements, negative if they are substitutes, and zero if they are independent 8

9. Goals/Identities II One’s goals and the effort expended to attain them are related 9

10. Goals/Identities, III Where is the effort the individual puts into his n th goal, the sum of his effort dedicated to his n th goal, e n, and any spillover from effort dedicated to his other goals,  mn e m, for all m, where  mn < 1, 10

11. Goals/Identities IV e n* ( n ) represents the individual’s belief of the effort required to attain the hoped for ideal, a construct that depends on the society in which the individual lives both narrowly and broadly defined, and/or the individual’s self-assessment of the effort required to attain his personal goal. n is a vector of conditioning variables – focal points or probabilities of achievement, upon which beliefs about goal n are conditioned. 11

12. Implications of the model, I Individuals’ utility is defined over goals rather than consumption and leisure An individual’s hopefulness or lack thereof affects the cost of achieving his goals and the resources he has to do so. The utility function does not conform to expected utility assumptions since probabilities, whether exogenous, affected by own actions or conditioned by hope or despair, are embedded in the effort required for attainment of one’s goal ideal. Utility is neither separable across goals with different probabilities of achievement nor across time. 12

13. Implications of the model, II Since an individual’s resources are limited, goal attainment may be constrained regardless of how hopeful or despairing the individual is. As despair deepens, the agent’s choice set shrinks: as the effort required to achieve anything rises and his resource endowment falls few, if any, goals remain achievable. 13

14. Decisions in Despair Suicide When unemployed – In response to active labor market policies If homeless If discriminated against/discouraged 14

15. Policy design Policies need to be designed taking into account higher costs and lower benefits of effort for the despairing relative to a typical rational, utility maximizing agent. Policy makers must recognize that – an individual’s effort requires emotional, psychological, spiritual, intellectual and economic resources, where these resources may be significantly constrained – valuations of costs and benefits are conditioned on/by the individual’s emotional/existential state, his perception of his place in (not in) society, and his hopes and aspirations. For policies to be effective the person, rather than the hypothesized agent, must be at the center of policy design. 15

16. Conclusion By examining individuals in despair, understanding how despair affects their available resources, their valuations of the costs and benefits of effort aimed at achieving their goals, and their ability to plan for a future, it is possible to adapt our thinking, our models and our policies to account for despair. We must recognize that an individual’s emotional/existential state affects his resources, valuations, rate of time preference, and, thus, decisions. We should, as economists, be able to model better the individual, in isolation or in society, and design better policies to improve that individual’s lot. 16