Why some people are not as happy as they could be: the role of unobservable subjective factors

This paper investigates the relative importance of unobservable subjective factors (i.e., genetic, personality, cognitive traits) on happiness. We apply a residual-based approach to distinguish between the direct and indirect effects of unobservable subjective time persistent traits on happiness. We refer to the 'indirect' effects as the effects of unobservable variables on happiness mediated by social, economic and family factors. We find that these 'indirect" effects only explain approximately 25% of the happiness variation at the individual level, while unobserved (i.e., genetic and personality) traits may explain up to 75% of the differences in happiness. We also find that socioeconomic, demographical and institutional factors better explain the variance of happy vs. unhappy people. The empirical analysis is based on the European Quality of Life Survey dataset.