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    Happiness And Wealth
    By Warren Davies | August 18th 2010 01:25 AM | 3 comments | Print | E-mail | Track Comments
    About Warren

    I am Warren Davies, a 28 year old student of psychology. I am male, and have been my whole life. I became interested in psychology many years ago...

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    Does money make you happy?  Economists think so - the concept of 'utility' assumes that economic activity represents people consuming in ways that best supports their happiness.  And yet, high sales of Backstreet Boys CDs prove that this cannot be true.  What's going on here?


    Happiness is a difficult thing to study scientifically


    I have had many conversations with people, who, after I tell them I study positive psychology, question whether happiness can be measured.  It's intangible, they say.  Sometimes this is the same type of person who just took a personality test to find out what kind of fruit they are.  But they have a point - it's hard to study topics that are well established in common vernacular, because everyone has a slightly different idea of what it 'is'.  


    This probably deserves a blog of it's own, but for now, it's probably better to use the term 'life satisfaction', or 'subjective well-being', which is a cognitive appraisal of your own life.  "All things considered, how happy are you with your life right now, on a scale of 1 to 7?"  That's an example of what a scale item might be.  So just so you know, that's what I mean when I say 'happiness'.


    Within the Nation


    When you look inside a nation, you tend to find that there is a positive correlation between happiness and wealth.  It's usually between .1 and .2 - so pretty weak, and the large sample sizes are probably contributing to that being a statistically significant result (Diener and Oishi, 2000).  You tend to get stronger correlations when you zoom in a little further, and specifically look at poorer areas.


    General rule - being the richest person in a poor area, you're likely to be a little happier than the rest.


    Between the Nations


    What happens if you plot the happiness and income of loads of countries on a scatter graph?  You get something roughly like this (I just drew this BTW):


    Apparently, after a country gets to about $10k per capita, the correlation weakens, and wealth brings diminishing returns after that.  But why?


    One possibility is the infamous hedonic treadmill.  This theory has had some revision lately (Diener et al, 2006), but the model basically proposes that as your standard of living rises, so do your expectations!  Therefore you need to continually increase your wealth to even remain at the same level of happiness.  One study found a similar situation with lottery winners - they are ecstatic when they first win, but after a while, they get used to the trappings of wealth and happiness returns to a similar level as before they won (Brickman, Coates and Janoff-Bulman, 1978).


    This apparent paradox is reflected in longitudinal data in many countries - over time, countries have tended to increase their wealth, but during the same periods, happiness has not increased.  Graphs of the 'Easterlin Paradox' tend to look like this (again, drew it myself to illustrate!):


    GDP and happiness displayed roughly over time

    But as I'm sure you'll have noticed over the last couple of years, when a nation's income drops suddenly, we do react to that.  This is classic Prospect Theory (e.g., Tversky&Kahnemann, 1991) - we are more sensitive to losses than we are to gains.


    It's not the size, it's what you do with it that counts


    As I mentioned earlier when talking about GDP, there are numerous ways you can use your wealth.  On one hand, wealth might have a direct impact on happiness - knowing you are wealthy/high status, not worrying about bills/having security, on the other hand, there might be indirect effects related to how you got it and what you do with it.  If you work 80 hours a week and don't have time to enjoy the wealth, is knowing you have it enough?  On the other hand, if you don't have a lot, but you use it in the right way, would that actually be a better strategy, in terms of happiness?


    The latter looks to be true (although that wont stop either person wanting more money!).  People who spend money on other people end up happier than those who spend it on themselves - and this was found in cross-sectional, longitudinal, and experimental studies (Dunn, Aknin and Norton, 2008).  Another study found that spending money on 'experiences' results in greater happiness than spending it on possessions (Van Boven&Gilovich, 2003).  This is probably because spending money on other people builds bonds and relationships, and experiences create 'memory-capital', which you can always reminisce over, think about etc., while a possession will be obsolete in a year or so - after which it will probably be a source of UNhappiness!


    Does money make you happy?


    Yes and no.  It doesn't seem to be a simple case of "get rich, get happy" (but if you're not rich, that probably won't be any consolation!).


    If you are poor and get money, there's a good chance you'll get happier; there seems to be a small overall correlation.  But the relationship is not direct or simple - we adapt to circumstances, and how we spend the money also plays a role.


    Maybe when you're considering buying that big screen TV, try some kind of experiential purchase instead?  Or spend the money on another person (me, for instance).  And for God's sake, don't buy a Backstreet Boys CDs!


    References:


    Brickman, P., Coates, D.,&Janoff-Bulman, R. (1978). Lottery Winners and Accident Victims: Is Happiness Relative. Journal of Personality and Social Psychology, 36(8), 917-927.


    Diener, E., Lucas, R.,&Scollon, C. N. (2006). Beyond the hedonic treadmill: Revising the adaptation theory of well-being. American Psychologist, 61, 305-314.


    Diener, E. and Oishi, S (2000) Money and happiness: Income and subjective well-being across nations, in E. Diener and E.M. Suh (eds.), Subjective Well-being across Cultures, Cambridge, MA: MIT Press

    Dunn, E. W., Aknin, L.,&Norton, M. I. (2008). Spending money on others promotes happiness. Science, 319, 1687-1688.

    Tversky, A.,&Kahneman, D. (1991). Loss aversion in riskless choice: A reference-dependent model. Quarterly Journal of Economics, 106 , 1039-1061

    Van Boven, L.,&Gilovich, T. (2003). To Do or to Have? That Is the Question. Journal of Personality and Social Psychology. Vol 85(6), 1193-1202.

    Comments

    Gerhard Adam
    Economists think so - the concept of 'utility' assumes that economic activity represents people consuming in ways that best supports their happiness.
    Well at least they've got enough sense to not assert that people consume in ways to make themselves unhappy.  However, most economists tend to live in the land of sugar plum fairies, so I guess anything that makes a bit of sense should be credit due to them.

    I'm not clear on why the psychological element of money should be subject to this kind of discussion.  We're not amoeba.  We don't have a simple stimulus-reaction response to money any more than we do it for anything else.  The gain in money can make us happier provided that is solves problems that were making us unhappy.  Similarly the loss of money doesn't necessarily result in severe depression.

    Human psychology has far too many factors influencing it to offer such a simplistic relationship regarding happiness.

    I think it's safe to say that the lack of money can be a cause of stress, so it stands to reason that acquiring money will alleviate that and cause a rise in happiness.  However, this will give rise to different stresses, for which money is neither the problem nor the solution.

    A similar example could be used for food.  Too little causes starvation, while too much causes obesity.  However we can all agree that a starving individual would be a great deal happier with more food.  An overweight individual will probably not be happier with less food until they lose some of the weight.  At that point we might expect that they also become happier. 

    So, all in all, it seems pretty obvious.  Happiness is not a single push-button reaction to any particular event.   I guess I'll have to rethink my original statement.  Economists still don't have any sense regarding how an economy actually works with real people.
    Mundus vult decipi
    Warren Davies
    "_However, most economists tend to live in the land of sugar plum fairies."
    I'm jealous, in a way.  It looks so nice there!


    "_I'm not clear on why the psychological element of money should be subject to this kind of discussion.  We're not amoeba.  We don't have a simple stimulus-reaction response to money any more than we do it for anything else.  "


    Well, I can't argue that we're not amoeba, and calling it a simple stimulus-reaction might not be framing it fairly, but we definitely respond to money.  If you checked your bank balance and it has $20,000 more than you expected, would you not react?  My guess is you'd first be surprised, then happy, then worried.  If it was me, I'd then hatch a plan of some kind so that I might keep it!*


    The gain in money can make us happier provided that is solves problems that were making us unhappy.  Similarly the loss of money doesn't necessarily result in severe depression.
    Yes, happiness isn't necessarily the removal of unhappiness.  If you have a stone in your shoe and you take it out, you could say that you are happier, but there's something different between relieving stress and increasing happiness.  Which is basically what we're both saying here, I guess.
    Human psychology has far too many factors influencing it to offer such a simplistic relationship regarding happiness.
    You said that a gain in money can make us happier, and the lack of money can cause stress, but also that this is too simplistic?

    But I agree this isn't a push button reaction, there's lots of things that go along with money that could influence happiness - status, how you spend it, who you spend it on, how your friends react to it, etc etc.  Not to mention all the other stuff that influences happiness, which might be separate from or interact with financial situation.  It's a complicated picture, but we can see it more clearly by looking at it one piece at a time.

    *Just kidding.  Of course I would report the situation to the proper authorities.
    In the future you rarely remember if you had much money or you didn't, as long as the fact hadn't caused some psychological trauma (not being able to pay the rent for example). So my conclusion would be that it's not money that makes people happy or they would primarily remember what was their bank account balance in the past. :)