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Dear Reader: I’ve been asked to share this excerpt from

The Myths of Happiness so often that I decided to share it on my blog. Please take a look at the four key points below:

 

Much has been said and written about whether money makes people happy, and the conclusions offered can differ radically, depending on which psychologists, economists, or commentators we listen to. Indeed, the data are confusing and contradictory, but I believe that I can offer some reasoned, data-based conclusions.

1. Income and happiness are indeed significantly correlated, although the relationship isn’t super strong.1

In other words, it’s true that the higher we are on the economic ladder, the happier we report ourselves to be. In many ways, this finding is not at all surprising, given that having money not only gives us opportunities to acquire conveniences and luxuries, but affords us greater status and respect, more leisure time and fulfilling work, access to superior health care and nutrition, and greater security, autonomy, and control. Wealthier people lead healthier lives, have the wherewithal to spend time with people they like, live in safer neighborhoods and less crowded conditions, and enjoy a critical buffer when faced with adversities like illness, disability, or divorce. Indeed, it’s a wonder that the correlation between money and individual happiness isn’t stronger than it is.

Two important caveats are in order, however. First, the relationship between happiness and money only holds for a certain kind of happiness. When people are asked to consider how happy or satisfied they are in general, those with more money report being happier and more satisfied. But when people are asked how happy they are moment-to-moment in their daily lives—e.g., “How joyful, stressed, angry, affectionate, and sad were you yesterday?”—then those with more money are no more likely to have experienced happy feelings.2 This pattern of results suggests that wealth makes us happy when we are thinking about our lives—“Am I happy overall? Well, I’m making a good living, so I must be”—but money has a much smaller impact on our feelings as we actually live our lives (“Am I happy today?”).3

The second caveat, which may be even more important, is that when psychologists, sociologists, and economists discuss the relationship between money and happiness, they invariably assume that money is the causal factor. But, of course, the causal direction could (and undoubtedly does) go both ways. That is, money buys happiness, but happiness also buys money. Indeed, several studies have suggested that happier people are relatively more proficient or gifted at earning more.4

2. The link between money and happiness is a great deal stronger for poorer people than richer ones.5

When our basic needs for adequate food, safety, health care, and shelter aren’t met, an increase in income makes a much larger difference for us than when we are relatively comfortable. Another way to put it is that money makes us happier if it keeps us from being poor. After all, those of us who have very little are more likely to be evicted from our homes, go hungry, live in a crime-ridden community, have a child drop out of school, lack the resources to obtain medical care, or be unable to manage the pain, stress, and practical demands of a disease or disability.6 Even a modest increase in income can alleviate or prevent many of these adverse situations.

These ideas help explain why money makes poorer people happier, but why does money have a relatively weak effect on wealthier people’s happiness? One answer is that as income rises beyond a certain level, its positive effects (e.g., the ability to fly first class or retain top-notch medical specialists) may be offset by some negative effects, like increased time pressure (e.g., longer working hours and commutes) and increased stress (e.g., holding powerful positions, anxieties about investments, and problems with overindulged children).7 And because wealth allows people to experience the best that life has to offer, it can reduce their capacity to savor life’s small pleasures.8

3. The link between money and happiness is even stronger when nations (as opposed to individuals) are compared.

Those of us who live in wealthier nations are a great deal happier than people who live in poorer nations.9 A huge caveat, however, is that wealthier nations don’t just have higher GDPs than poorer nations; they are also more likely to be characterized by democracy, freedom, and equal rights, and less likely to have political instability or rampant corruption and graft. Consequently, it’s not clear what really drives the relationship between wealth and happiness at the national level.

4. In many countries, as people’s economic fortunes have improved, their average reported happiness levels have not budged.10

This last finding seems puzzling in light of the fact that people who have more money are happier. Hence, it’s this particular finding that is usually behind proclamations in the media or elsewhere that money does not buy happiness. From my previous descriptions of research, you can probably already speculate about why, for example, Americans have not gotten happier as their incomes have tripled.11 First, higher incomes foster higher aspirations, such that we now consider necessary what we once considered extravagant or optional (such as vacations, cars, or indoor plumbing). Second, higher incomes force a shift in our social comparisons, such that we now feel poorer relative to people in our neighborhoods or offices who have more than we do.12

 

References

1For a review of this vast literature, see Diener, E., & Biswas-Diener, R. (2002). Will money increase subjective well-being? A literature review and guide to needed research. Social Indicators Research, 57, 119–169.

2(1) Diener, E., et al. (2010). Wealth and happiness across the world: Material prosperity predicts life evaluation, whereas psychosocial prosperity predicts positive feeling. Journal of Personality and Social Psychology, 99, 52-61. (2) Kahneman, D., & Deaton, A. (2010). High income improves evaluation of life but not emotional well-being. Proceedings of the National Academy of Sciences, 107, 16489-16493. (3) Luhmann, M., Schimmack, U., & Eid, M. (2011). Stability and variability in the relationship between subjective well-being and income. Journal of Research in Personality, 45, 186-197.

3Kahneman & Deaton (2010). op. cit. See ch. 6, note 267

4Diener, E., et al. (2002). Dispositional affect and job outcomes. Social Indicators Research, 59, 229-259. For a review, see Lyubomirsky, King, et al. (2005), op. cit. (See ch. 4, note 207).

5(1) Deaton, A. (2008). Income, health and well-being around the world: Evidence from the Gallup World Poll. Journal of Economic Perspectives, 22, 53-72. (2) Diener et al. (2010), op. cit. (See ch. 6, note 267). (3) Eckersley, R. (2005). Well and good: Morality, meaning and happiness (2nd ed.). Melbourne: Text Publishing. (4) Howell, H., & Howell, C. (2008). The relation of economic status to subjective well-being in developing countries: A meta-analysis. Psychological Bulletin, 134, 536–560. (5) Inglehart, R. (2000). Globalisation and postmodern values. The Washington Quarterly, 23, 215–228.

6For an interesting study showing that wealth buffers well-being after experiencing a disabling health condition, see Smith, D. M., et al. (2005). Health, wealth, and happiness: Financial resources buffer subjective well-being after the onset of a disability. Psychological Science, 16, 663-666.

7(1) Kristof, K. M. (2005, January 14). Study: Money can’t buy happiness, security either. Los Angeles Times, C1. (2) Levine, R., & Norenzayan, A. (1999). The pace of life in 31 countries. Journal of Cross-Cultural Psychology, 30, 178–205. (3) Ng, W., et al. (2008). Affluence, feelings of stress, and well-being. Social Indicators Research, 57, 119–169.

8Quoidbach, J., et al. (2010). Money giveth, money taketh away: The dual effect of wealth on happiness. Psychological Science, 21, 759-763.

9(1) Diener & Biswas-Diener (2002). op. cit. (See ch. 6, note 266). (2) Diener, E., Diener, M., & Diener, C. (1995). Factors predicting the subjective well-being of nations. Journal of Personality and Social Psychology, 69, 851–864. (3) Inglehart, R., & Klingemann, H-D. (2000). Genes, culture, democracy, and happiness. In E. Diener & E. M. Suh (Eds.), Subjective well-being across cultures (pp. 165-183). Cambridge, MA: MIT Press. (4) Stevenson, B., & Wolfers, J. (2008). Economic growth and happiness: Reassessing the Easterlin Paradox. Brookings Papers on Economic Activity, 1-87.

10This finding is at the heart of the so-called “Easterlin paradox”: (1) Easterlin, R. A. (1974). Does economic growth improve the human lot? Some empirical evidence. In P. A. David & M. W. Reder (Eds.), Nations and households in economic growth: Essays in honor of Moses Abramowitz (pp. 89-125). New York: Academic Press. (2) Easterlin, R. A., et al. (2010). The happiness-income paradox revisited. Proceedings of the National Academy of Sciences, 107, 22463-22468. (3) Diener, E., Oishi, S., & Tay, L. (2011). Easterlin is wrong – and right: Income, psychosocial factors, and the changing happiness of nations. Manuscript under review. (4) Diener & Biswas-Diener (2002). op. cit. (See ch. 6, note 266). (5) Oswald, A. J. (1997). Happiness and economic performance. The Economic Journal, 108, 1815-1831. For a recent challenge to these findings, see Stevenson & Wolfers (2008). op. cit. (See ch. 6, note 274).

11Myers, D. G. (2000). The funds, friends, and faith of happy people. American Psychologist, 55, 56-67.

12(1) Blanchflower, D. G., & Oswald, A. J. (2004). Well-being over time in Britain and the USA. Journal of Public Economics, 88, 1359–1386. (2) Boyce, C. J., Brown, G. D. A., & Moore, S. C. (2010). Money and happiness: Rank of income, not income, affects life satisfaction. Psychological Science, 21, 471-475. (3) Clark, A. E., Frijters, P., & Shields, M. A. (2008). Relative income, happiness, and utility: An explanation for the Easterlin paradox and other puzzles. Journal of Economic Literature, 46, 95–144. (4) Clark, A. E., & Oswald, A. J. (1996). Satisfaction and comparison income. Journal of Public Economics, 61, 359–381. (5) Ferrer-i-Carbonell, A. (2005). Income and well-being: An empirical analysis of the comparison income effect. Journal of Public Economics, 89, 997–1019. (6) Luttmer, E. F. P. (2005). Neighbors as negatives: Relative earnings and well-being. Quarterly Journal of Economics, 120, 963–1002.

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