Behavioral New World
July 1, 2024
Money Can’t Buy Happiness? Well, it’s not that simple
In the “Can money buy happiness?” debate, an oft-cited number is $75,000. That is, money does not substantially increase happiness when income crosses the threshold of $75,000 in annual income. The figure comes from a 2010 study by Kahneman and Deaton (link) in which they conclude, “We infer that beyond about $75,000/year, there is no improvement whatever in any of the three measures of emotional well-being” (happiness).
There is a certain logic to this finding. If you are struggling to put food on the table or to find affordable housing in a safe neighborhood, then extra income means a lot. But economists speak of “declining marginal utility” which suggests that the subjective value of additional income will diminish as income increases.
Kahneman and Deaton also look at “life evaluation,” which is the level of satisfaction that people report when they reflect on their lives. Their research shows that satisfaction increases with income without the flattening out that they observe with happiness. That is, more income is unambiguously associated with more life satisfaction.
All of that means some significant nuances are involved when exploring this topic. Here are a few to start with:
Nuance1: Happiness and satisfaction are distinct psychological measures. Think of happiness as “in the moment,” and satisfaction as a reflection on a longer period. For example, I can be unhappy today but satisfied with my overall life trajectory. The Kahneman and Deaton study suggests that the relation between happiness and income is different from that between satisfaction and income. (A detailed explanation of the concepts and data can be found here.)
Nuance 2: A recent Wall Street Journal podcast (link) points out that $75,000 in 2010 is equivalent to about $110,000 now. That might explain why you were thinking that $75,000 is a rather low cutoff.
Nuance 3: There are some people who never seem to be satisfied. This phenomenon is not new. Boethius, who lived c. 480 - 524, wrote,
Greed opens new maws
There are no limits, no satiation
Even in those who choke on their wealth and good fortune
Their thirsts yet burn with poverty’s need [1]
This phenomenon is the “hedonic treadmill” that I warn about in Chapter 1 of my book, The Foolish Corner. One way to get off the treadmill is to stop “comparing up.” For example, there will always be someone richer than you are (the one exception being the richest person in the world). Think instead of how much better off you are than most people in the world (this is certainly true of the readers of this newsletter).
What about lottery winners? You may have heard that lottery winners feel no happier in the long run than they were before the Big Win. In fact, one study (link) reports that one-third of lottery winners go bankrupt within five years (!) – not a happy outcome. However, there is also research suggesting that medium-size lottery winnings are associated with “better psychological health” (link). Let’s call that Nuance 4. We may be better off with a Medium Win than with a Big Win.
So where does this leave us? My interpretation: Money is obviously important for securing the basic needs of life, which include food, shelter, and safety. After that, it is more a matter of attitude. Two suggestions: 1) Avoid upward comparisons, and 2) focus on experiences, as research (link) suggests that experiences rather than material goods result in greater happiness. That’s not to say though that some material things can’t be seen as experiences (link). Nuance 5 perhaps? As the title of this piece indicates, happiness and related mental states are not that simple. 😊
[1] The Consolation of Philosophy, Harvard University Press, 2008, pp. 33-34.
The correlations of income and happiness is real and money can definitely improve our sense of well being when used wisely.
There are many other meanings and purposes such as health, good relationships, loves (?) that contributes to our happiness which dollars can’t buy.
I often think of money as a "demotivator" as well. I don't compare up to Bill Gates or people who I don't know or who have obviously made sacrifices that I would not (Gates also gave up a lot for what he got). However, I compare sideways. When I see someone who is at my level in terms of position, make 2x what I do but contributes very little to the organization or just does a minimal amount, it is demotivating. In the past, that has meant that I have sought a new job elsewhere.
Today, I realize that is part of the organization in which I work (Higher Ed system with Tenure), and I receive a lot of psychological income from the students and people I interact with and help than these higher earners.