Home Finance Behavioral Finance How Much Money Will Make You Happy?

How Much Money Will Make You Happy?

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According to two Nobel Prize winners, $75k should be enough.

Money and happiness. Two very different concepts that have gotten a lot of attention on the field of economics. So much so, that there is two different Nobel Prize winners who have looked into this topic: Daniel Kahneman (won in 2002) and Angus Deaton (won in 2015).

Now for the average behavioural economist/scientist, the name Kahneman rings about as many bells as any study by Pavlov did. The name Deaton however, is a bit more obscured. And hardly a household name for the average behavioural enthusiast. So, let’s look into him.

Much of Deaton’s work has focused on inequality and poverty, and how the world’s poorest countries face significant economic and health challenges. Using this as a starting point, Deaton is famous for studying consumption in general: how we use goods and services, and what that means for our welfare.

Moreover, Deaton created the “Almost Ideal Demand System,” with John Muellbauer in 1980, shaping the research into consumption of commodities. Moreover, his research has made an incredible impact on how economists measure living standards and poverty in developing countries. In the words of the Nobel Prize Committee: “Deaton helped transform development economics from a largely theoretical field based on crude macro data, to a field dominated by empirical research based on high-quality micro data.”

When it comes to someone telling you how much you need to earn and/or consume to be happy, or at least make an impact on your welfare, Deaton seems to be the man.

The topic of the work he did with Kahneman is then of course hardly surprising: Deaton looking into consumption and welfare, and Kahneman having made the transition into happiness studies. The unsurprising result of this collaboration is research that focused on how much money would make you happy.

Well?

It seems that $75,000 in annual salary should do it.

If you read articles by Forbes (etc.) you’ll have this number thrown at you from all angles. But what does the actual paper actually claim?

The official title of the paper is: High income improves evaluation of life but not emotional well-being. These are two very different measures for subjective well-being, as taken from the paper:

  • Emotional well-being refers to the emotional quality of an individual’s everyday experience—the frequency and intensity of experiences of joy, stress, sadness, anger, and affection that make one’s life pleasant or unpleasant.
  • Life evaluation refers to the thoughts that people have about their life when they think about it.

What this paper is actually showing is that these two concepts relate very differently to income. Within the paper, they ask whether money buys happiness, separately for these two aspects of subjective well-being.

The method they use to find out these relationships is by running an analysis of more than 450,000 responses to the Gallup-Healthways Well-Being Index (a daily survey of 1,000 US residents). Emotional well-being is being measured by questions about emotional experiences had the day before and life evaluation is being measured by Cantril’s Self-Anchoring Scale (you can ask yourself how much stock you place in these two measuring tools).

Now, what do they find? Life evalutation is more related to income and education, whereas health, care giving, loneliness, and smoking are relatively stronger predictors of daily emotions.

The main thing this paper centres itself around is the graph down below (fig. 1). When looking at figure 1, it isn’t immediately clear where the 75.000 comes from. Well, this paragraph might help:

” Fig. 1 shows that for all measures of experienced well-being, individuals in the lower- income groups do worse on average than those above them, but that those in the top two groups do not differ. For the two top categories to be equal, the entire range ofthe second category must lie above the satiation point. This observation implies that emotional well-being satiates somewhere in the third category of income from the top. We infer that beyond about $75,000/y, there is no improvement whatever in any of the three measures of emotional well-being. In contrast, the figure shows a fairly steady rise in life evaluation with log income over the entire range; the effects of income on individuals’life evaluations show no satiation, at least to an amount well over $120,000.”

To help you out here: the income categories seem to be as follows (which can also be seen in the graph):

1. Category 1: 0 – $60,000
2. Category 2: $60,000 – $90,000
3. Category 3: $90,000 – $120,000
4. Category 4: > $120,000

Description of figure taken from paper: Fig. 1. Positive affect, blue affect, stress, and life evaluation in relation to household income. Positive affect is the average of the fractions of the population reporting happiness, smiling, and enjoyment.“Not blue”is 1 minus the average of the fractions of the population reporting worry and sadness.“Stress free”is the fraction of the population who did not report stress for the previous day. These three hedonic measures are marked on the left-hand scale. The ladder is the average reported number on a scale of 0–10, marked on the right-hand scale.

So where does the $75,000 come from? It’s the average of the 2nd category. Between $60,000 and $90,000 lies $75,000. Easy as that.

When looking at the graph, we see that life evaluation rises steadily. Emotional well-being (positive affect) also rises with log income, but there is no further progress beyond an annual income when reaching the second category, at about its halfway point.

There is a whole bunch of other results to be found within this paper, rather than just the arbitrary number of $75,000. More important to keep in mind is that low income exacerbates the emotional pain associated with such misfortunes as divorce, ill health, and being alone. Children make you more worried and stressed. And stress in general leads to worse life evaluation and health. So that one is a vicious cycle. But these results are quickly mentioned, not to overshine the $75,000.

In the end, Deaton and Kahneman conclude that high income buys life satisfaction (positive life evaluation) but not happiness (high emotional well-being), and that low income is associated both with low life evaluation and low emotional well-being.

You know what I think you can take away from this paper? Happiness is fleeting, positive life satisfaction is not. As such, aim for the latter. How? Well, the paper showed that the strongest predictors for positive life evaluation are income and education. And although people really are grasping to this $75,000, I’m not buying it. Especially as a salary. I don’t know what that means for a non-American, or a different tax-system. How much should I have in assets next to it? What if I’m in massive debt? Is there an age minimum or maximum to earning that salary? Many questions are left after reading the actual study.

The ultimate conclusion is not exactly a far-fetched one: you’ll be more positive about life when you’re already privileged: with high income, likely gained from good education. Shocking.

Although it can’t hurt to be in good health and stop smoking. Just saying.

References

Kahneman, D., & Deaton, A. (2010). High income improves evaluation of life but not emotional well-being. Proceedings of the national academy of sciences, 107(38), 16489-16493.

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Merle van den Akker
Merle van den Akker is a PhD student in Behavioural Science, at the Warwick Business School. She studies the effect different payment methods, especially contactless and mobile methods, have on how e manage our personal finances. In her "free" time she writes articles on personal finance, behavioural science, behavioural finance and life as a PhD student, these are all published on Money on the Mind. With DDI, she writes on personal and behavioural finance, to ensure that knowledge from academia trickles into the mainsteam, and can help as many people as possible!

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