Friday, January 7, 2011

Happiness and Income

Would you rather be rich or happy?  You might think the one naturally brings the other, but it turns out not to be so simple.

One important factor is how we frame the alternatives.  Would you rather make $80,000 a year or $140,000?  It’s a no brainer.  But if framed, as Daniel Benjamin, Ori Heffetz, Alex Reese-Jones, and Miles Kimball did in a recent study: would you prefer to earn $80,00 a year and sleep 7.5 hours a night or $140,000 and sleep 6 hours?  When framed this way, 70% of folks said that would prefer more sleep. (see
Or, as my colleague Bob Frank has present it, would you prefer to live in a 4000 sq. ft. house with a 45 minute commute or a 2500 sq. ft. house with a 10 minute commute?  Or what about if the smaller house were closer to friends and family?  Often, what seems at first blush to be an obvious choice (bigger is better) becomes much more complicated considering all of the (often social) implications.  And lots of research shows that investment in social relations has a big impact on long-term happiness.

In the mid 1970s, economist Richard Easterlin made a remarkable observation that seriously challenged the simple equation of money=happiness.  The Easterlin Paradox holds that overall hedonic happiness within countries does not correlate with higher GNP per head between counties (above a certain level, often cited by Richard Layard as $15,000). 

But a lot rests on what “happy” means.  Folks who try and measure such things distinguish between an immediate here-and-now happiness (“hedonic” happiness: how happy are you right now?) and longer term life-satisfaction (wellbeing: how satisfied are you with your life as a whole these days?).

For hedonic happiness, the immediate evaluation of one’s present state does not dramatically increase with income (below a certain level).  Daniel Kahneman and Angus Deaton (2010) argue that this is due to the psychological phenomenon of adaptation: we are adapted to our social contexts and measure of day-to-day ups and downs in terms of the norms of our lives and social worlds.  

But, it is a different story for overall life satisfaction.  This longer term view, assessing the full sweep of one’s life, tends to be correlated with income.  As Kahneman and Deaton observe, “high income buys life satisfaction but not happiness.” 

The geography of life satisfaction:
From: Wikipedia entry on Happiness Economics

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