Investor Psychology

Can Money Make You Happy?

The relationship between happiness and income can be summed up in a simple equation, but really, it's complicated.

Can money make you happy? An entire quantitative field of study, happiness economics, has grown up around that question. In reading the literature, I came to one inescapable conclusion: Happiness economics makes some academics happy because they can publish conflicting papers that help them earn tenure. Oh, and they’ve boiled down happiness to an equation:

Wit = α + βxit + εit

Simple, right?

But the real relationship between income and happiness is more nuanced, and measuring people’s true feelings is tricky. For example, when study subjects are asked how happy they think people at different income levels are likely to be, they generally underestimate the happiness of the poor. And because much of the research considers just two variables, with income on one axis and happiness on the other, the other factors that make us happy, such as personal relationships and health, are left out.

One of the best studies on the subject was done by economist Angus Deaton and psychologist Daniel Kahneman, winner of a Nobel Prize for Economics. The two, both professors at Princeton University, found that day-to-day happiness increases as income approaches $75,000 a year, but then levels off. The reasoning is that having more money helps us cope with life’s problems, so we feel less sad and stressed. At the $75,000-a-year cutoff point, Deaton says, money is no longer as big an issue.

But Deaton and Kahneman distinguish between day-to-day happiness and life satisfaction. People at every income level who see a rise in income consider themselves more successful. So for every 10% rise in income, people gain the same amount of satisfaction, whether they’re making $50,000 or $500,000.

The two researchers conclude: “High incomes don’t bring you happiness, but they do bring you a life you think is better.” I think there’s a dimension that statement ignores. In his book Rush: Why You Need and Love the Rat Race (Hudson Street Press, $26), Todd Buchholz makes a convincing case that striving and achievement, which often correlate with higher salaries, enhance happiness. Buchholz, a former Harvard economics instructor and former White House adviser, says, “The truth is, most people have a deep need to work and to create.”

Buying Happiness

Note that Buchholz doesn’t say owning more stuff makes us happier. Cornell University psychology professor Thomas Gilovich agrees—at least, he says, more stuff doesn’t make us happier for long. Gilovich, the author of one of my favorite books, How We Know What Isn’t So (The Free Press, $19), explains that possessions give us short-lived pleasure because we’re amazingly adaptable. When faced with a bad situation, adaptability can be very helpful—we adjust to the situation and it no longer bothers us as much. But when it comes to material things, such as a big-screen TV, the pleasure we take in them drops quickly. People who seek more stuff end up on “a hedonistic treadmill,” he says.

It’s much better, says Gilovich, to spend money on doing things rather than buying things. Experiences, such as vacations and barbecues with friends, don’t seem to be as easily devalued by our adaptive abilities. “You get a lot more social value out of your experiences,” he says. “When you talk to people about your experiences, it tends to be an enjoyable conversation. You talk about material goods much less.”

And our experiences don’t lend themselves to easy comparisons, which gives them unique value. Gilovich points out that with a car, for example, comparisons are too easy: “Your car costs less money? It gets better mileage and it’s more reliable? Argh! You have a better car than I do!”

But, he says, “What if you went to Bali and I went to Hawaii? Well, Bali’s more exotic, but I went to Hawaii with friends and I have my memories, and I’m not worried by that comparison.”

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