On the front page of the business section of the New York Times today, David Leonhardt reports on a recent study about the relationship of money and happiness. Personally, I love this debate. The “can money buy happiness” question seems to stick around as long as the nature versus nurture question. The article is about a new analysis by Betsey Stevenson and Justin Wolfers on the relationship of per capita GDP and average life satisfaction for most of the countries in the world. Unlike previous analyses, Stevenson and Wolfers find that there is, indeed, a positive relationship between per capita GDP and life satisfaction. This finding seems to rebut the famous Easterlin paradox of the '70s that suggested no such relationship.

So what's really going on? A closer examination of the data shows that even though there is a weak correlation between money and happiness, there is still a lot of variability from one country to another. Take a per capita GDP of $8,000, and you see that Brazilians are twice as happy as Bulgarians, both of which have this average level of income. There must be other factors in addition to money that account for happiness.

But one thing that money does do that seems to never make it into these discussions is the ability to buy options. Money gives you choices, even if you don’t act on them. And that is a comforting position to be in. It's not the material goods and services that money buys that seems to make people happy. Instead, it's the ability of money to buffer one against the misfortunes of life and to create opportunities to do new and different things. As I alluded to in a previous post, hope drives people's decisions – specifically the hope that the future will be better than the present -- and money in the bank is a good hedge against the future. Paradoxically, credit cards do the same thing by borrowing against the future. I wonder what the happiness graph would like if it were plotted against per capita debt.

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