Showing posts with label Economics of beauty. Show all posts
Showing posts with label Economics of beauty. Show all posts

Saturday, September 3, 2011

3/09/2011: Returns to Beauty

A fascinating study by Daniel S. Hamermesh and Jason Abrevaya, titled "BEAUTY IS THE PROMISE OF HAPPINESS?" was released yesterday by the NBER (Working Paper 17327 http://www.nber.org/papers/w17327). This is, folks, economics at its best: great question, great analysis and something that is way more relevant to life than banks, property and/or Obama's administration again blasting through the debt ceiling (oh yeah, they did that this week too - here).

Here's what I am talking about: "We measure the impact of individuals’ looks on life satisfaction/happiness. Using five data sets, from the U.S., Canada, the U.K., and Germany, we construct beauty measures in different ways that allow placing lower bounds on the effects of beauty. Beauty raises happiness: A one standard-deviation change in beauty generates about 0.10 standard deviations of additional satisfaction/happiness among men, 0.12 among women. Accounting for a wide variety of covariates, particularly effects in the labor and marriage markets, including those that might be affected by differences in beauty, the impact among men is more than halved, among women slightly less than halved."

"There are two main general mechanisms through which people’s looks could affect their satisfaction/happiness. The first is through the many channels that have been shown in the beauty literature to offer routes by which beauty affects economic outcomes. These indirect effects may be at least as important as the direct effects of beauty on satisfaction/happiness — the halo that good looks might impart to a person independent of the effects of beauty on any market-related outcomes. In the main economic exercise in this study, ...we decompose any measured impact of beauty on satisfaction/happiness into its direct and indirect components and thus examine the extent to which any beauty-happiness relation works through markets."

Hence, "The main economic question in this study is whether the effect of beauty on
satisfaction/happiness works through markets:
  • How much of the effect is direct—with people who are otherwise identical in every respect being happier/more satisfied than their less good-looking peers?
  • How much is due to the fact that beauty enhances one’s outcomes in various markets, including the labor and marriage markets?"
And here are the conclusions: "Taking the results at face value suggests that roughly half of the gross effect of looks works through the marriage and labor markets". However, "the available data do not allow us to account for impacts in other markets. As just one example, there is growing evidence that beauty confers benefits on good-looking borrowers in lending markets... Moreover, our proxies for the outcomes in the labor and marriage markets that are affected by beauty are far from perfect. It thus seems fair to conclude that the expanded estimates suggest that the direct effect of beauty is at most one-half of the total effect, and perhaps much less. The majority of the impact of beauty on satisfaction/happiness appears to be economic—through its effects on outcomes in various markets."

Yep, being beautiful pays. And hence, investing in beauty is a big business.

One other interesting point - notice that men-women differential in 'returns' to beauty are 0.1:0.12 - not exactly a massive one. "The results ...show only slightly greater gross effects of beauty among women than among men. The direct effects, however, are larger among women, with relatively less of the impact of beauty on women’s satisfaction/happiness working through markets. This gender difference may explain why, although most of the studies measuring the impact of beauty on earnings find larger effects among men than among women, laypeople believe that looks matter more to women."

I will have to add this to my reading lists for Investment Analysis and Economic Risk courses... Simply brilliant!