A Big Question: Does Money Buy Happiness?

One question I have spent considerable time trying to understand and personally address as a happiness and well-being researcher is whether money really does give us greater well-being or, as the question is commonly phrased, whether money will buy any extra happiness? There is a considerable amount of research on this subject and sometimes it can be difficult to unpick what is actually going on and understand the mains themes. The topic of money and happiness always seems to attract a lot of attention in the news and studies seem to sometimes report contradictory findings. However, there are often more subtle findings at heart and it is also important not to draw too much from one study. At times the research into this area can also be a little misleading so below is my summary of the most important ideas. There are references at the end for those who want to explore further.

Economic growth and well-being economy happinessPerhaps one of the most striking findings from subjective well-being research is that over the last 50 years, in spite of fairly consistent economic growth, people living in high income countries, for example the US and the UK, do not report that they are on average any happier with their lives (Easterlin, 1995). Some argue that mental health may have even deteriorated and is estimated to deteriorate even further (Michaud, Murray, & Bloom, 2001). In line with these ideas, once a country reaches a certain level of average income (GDP per capita) citizens show very little signs of becoming any more satisfied with life (Layard, 2006). One argument here is that once all our basic needs are accounted for extra incomes do relatively little to bring real sustainable increases to our well-being. This is somewhat concerning when developed countries actively pursue higher national income under the presumed belief that it will raise the well-being of its citizens. Although some researchers contend that economic growth does bring extra well-being (e.g., Stevenson & Wolfers, 2008) this conclusion, it has been argued, seems largely to have been drawn from mixing up short-term with long-term fluctuations in the economy (Easterlin et al., 2010). If there are any increases in well-being from economic growth it is either extremely small (see two paragraphs down) or due to other factors, such as democracy, that often accompany economic progress.

Personal income increases and well-beingface_happinessThere is, however, evidence that people with higher incomes are more satisfied and happier with their lives (Lucas & Schimmack, 2009). Likewise income changes are associated with changes in satisfaction and happiness (Frijters, Haisken-DeNew, & Shields, 2004), and winning small amounts on the lottery may improve a person’s mental health (Gardner & Oswald, 2007). So then money does seem to buy happiness? In a way, YES! However, does money bring a lot of happiness? NO, not a lot! My personal reading of the income-happiness research is that the degree to which more money impacts on well-being can sometimes be misleading. There are two reasons.

Deception 1: Statistically significant but practically trivialsignificantWhen we analyse large nationally representative samples we find that people with higher incomes tend to have higher well-being. This association however is very weak but often termed to be “significant”. The use of the word “significant”, however, can be misleading. In academic speak when we say something is significant we mean it is “statistically significant”, i.e. that is there is a real effect there that is beyond statistical chance. The word significant, however, does not relate in any way to the strength, size or magnitude of the relationship. In fact with a large enough sample it is possible to find statistical significance on very weak effects. So it is also highly important to discuss the magnitude of the effect of money on well-being and this doesn’t always take place, particularly in economic research on this subject. Psychologists seem much more aware of this issue, and in fact some psychologists would view the effects linking income and well-being to be so small that the topic isn’t even worth investigating further. In essence the association is very weak and whilst on average people with the most money tend to be the happiest we find that there are also many people with high incomes who are very unhappy and others with low incomes who are very happy.

Deception 2: It is losses that really matter

Most research relating changes in income with changes in well-being rarely distinguishes between whether the income change came about due to a loss or a gain. A decrease in income is implicitly assumed to have an equal and opposite influence on well-being as an equivalent gain. However, for decades researchers have shown that losses and gains have different psychological effects (Kahneman & Tversky, 1979). Applied to well-being research it has been shown that gains hardly matter for well-being but losses, however, matter substantially (Boyce, Wood, Banks, Clark, & Bro2013). Hence, conclusions as to how much more income would increase well-being are substantially overestimated if losses are not separated from gains. It has been suggested that this may in part explain why national income growth has not been accompanied by long-term rises in well-being – the psychological benefits of any income gains may be completely undermined by much smaller income losses.

Any impact of income increases on well-being is very small

Some of my own research has tried to highlight just how relatively unimportant money is for raising well-being. We have tried to highlight that money is not an effective way of increasing well-being (Boyce & Wood, 2010). This magnitude effect is extremely important if we have chosen to pursue higher incomes at the sacrifice of other things that are perhaps more important for our well-being, such as our social relationships, physical and mental health, and how we react to certain situations. In fact for money to really shift well-being by a meaningful amount a substantially large amount of money would be needed (Lucas & Schimmack, 2009). Realistically such large changes to income, such as winning the lottery, are very unlikely to take place and, even then, are not guaranteed to bring happiness.

But people still pursue high incomes – why?huhAlthough the relationship between income and well-being is very weak the money and happiness question still makes for an interesting area of discussion. Why? Money and the desire for it seem to dominate our day to day lives. Some people may perceive that money is genuinely important for their lives and their well-being. Others, although maybe agreeing that money is relatively unimportant on one level, still act as if it is one of the most important things and let decisions about money dominate their lives. It is therefore very important to understand why money is so heavily prized for personal happiness in spite of evidence to the contrary (Ahuvia, 2008).

Income rank and well-being

One explanation as to why income doesn’t raise well-being all that much, yet still presents a strong source of motivation, is to do with social comparison. Human-beings naturally compare with one another, and it seems that once basic needs are met what then becomes important is whether we have a higher income than other people. For example, we have shown that how our income ranks among similar others is more important for life satisfaction than how much income we have in absolute terms (Boyce, Brown, & Moore, 2010). We have also shown that this is true for mental health (Wood, Boyce, Moore, & Brown, 2012), and most recently for health; including objective physical health indicators (Daly, Boyce Wood, in press). This suggests that any income increases might not raise well-being at all if everyone else’s income also rises. This income rank hypothesis, whilst providing an explanation of why people are motivated by income, also helps explain why average happiness levels do not appear to rise in line with economic growth (there can only ever be a fixed amount of rank in society). The rank income explanation therefore again questions the value of pursuing income growth at the national level.

Income effects on well-being are not permanent

Another reason why money might not bring as much happiness as might be expected is that the effects of income on our well-being are often only short-lived. There is evidence to suggest that people adapt quite quickly to increases in income (DiTella, Haisken-DeNew, & MacCulloch, 2010). That is people quickly get used to any rises in their income and the new standards of living that their incomes can buy – for instance last year’s pay rise soon becomes the norm and stops having an impact on present well-being. People end up feeling like they need just a little more even though their income at one point in time was perfectly sufficient. The feelings of the short term buzz that more money can bring may result in an overestimation of the effect that money will have in the longer term.

And losses matter

A particular problem with adapting to higher incomes is that once a person gets used to having a higher income, such that it feels necessary to obtain a basic level of happiness, it can then become difficult to return to a lower standard of living without somewhat paradoxically resulting in substantial impacts in well-being. This links to our recent work highlighted above showing that income reductions result in larger impacts on well-being than income increases.

If people with more money seem happier this doesn’t necessarily mean that it was the money that made them socar guy smilingAnother interesting aspect to highlight about the relationship between money and happiness is that people with money can often seem to be more satisfied and happier, and this might lead to the mistaken conclusion that it was the money that made them happy. The income-happiness data shows that people with higher incomes tend to be a little bit happier. Further, we can often take a cursory look at people around the world and observe people with more money being happier than ourselves (perhaps this idea is often assisted by what the media portrays and advertisements suggest). However, such observations can be misleading. It is often not fully appreciated that two things which are correlated are not necessarily causal. It could be due to something else, some other factor that results in individuals being happier and earning a higher income. In fact what we find is that there are often aspects of an individual’s innate character that drive them to both earn more money and be more satisfied or happier. Personality, for example, explains a huge proportion of the income and well-being relationship (Boyce, 2010). Personality in fact seems to be one of the strongest and most consistent predictors of high well-being (Diener & Lucas, 1999) and, contrary to academic and popular belief, in very recent work we have begun to show not only that personality changes but also that such change can bring about substantially higher well-being than changes brought about by changes in economic factors.

My summary in a nut shell

Money isn’t really that important but it is easy to get trapped into thinking that it is. Sometimes it might be better with respect to well-being to invest time in other areas of our lives that are more fulfilling and can bring longer lasting and more sustainable happiness.

The idea that we need ever higher and higher incomes is sometimes difficult to escape from. But there are other ways. The first step is to be aware of the issues and to be aware that in many senses we are on a treadmill that we have to run faster and faster on just to stay where we are. Once we have awareness, we then have choice.

Some final thoughts and ideas:

What will happen if you get used to having a higher income? Will you get used to having a higher income but find yourself having to work too hard just to maintain a certain standard of living that may not have brought any real lasting benefit to your well-being?.

Why do we buy certain things? Is it because we just want to signal to other people something about our rank or status in society or because it genuinely brings real lasting benefits to our lives?

Could spending time, not money, on our families, friends and health be of greater benefit?

Could money earned be used to help other people (there is some interesting evidence to suggest that spending money on others does much more for our well-being than spending on ourselves – Dunn, Aknin, & Norton, 2008)

***If you like this post then you might like some of the other posts I have written about money and happiness:

References for those who wish to read further

Ahuvia, A. (2008). If money doesn’t make us happy, why do we act as if it does?Journal of Economic Psychology, 29, 491-507.

Boyce, C. J. (2010). Understanding fixed effects in human well-being. Journal of Economic Psychology, 31, 1-16.

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.

Boyce, C. J., & Wood, A. M. (2010). Money or mental health: The cost of alleviating psychological distress with monetary compensation versus psychological therapy. Health Economics, Policy and Law, 5, 509-516.

Boyce, C. J., Wood, A. M., Banks, J, Clark, A. E., & Brown, G. D. A. (2013). Money, well-being, and loss aversion: Does a loss in income have a greater effect on well-being than an equivalent income gain? Psychological Science, 24, 2557-2562.

Daly, M., Boyce, C.J., & Wood, A.M. (in press). A social rank explanation of how money influences health. Health Psychology.

Di Tella, R., Haisken-DeNew, J., & MacCulloch, R. (2010). Happiness adaptation to income and to status in an individual panel. Journal of Economic Behavior & Organization, 76, 834-852.

Diener, E., & Lucas, R. E. (1999). Personality and subjective well-being. In D. Kahneman, E. Diener & N. Scwarz (Eds.), Well-Being: The Foundations of Hedonic Psychology. New York: Russell Sage Foundation

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

Easterlin, R. A. (1995). Will raising the incomes of all increase the happiness of all? Journal of Economic Behavior & Organization, 27, 35-47.

Easterlin, R. A., McVey, L. A., Switek, M., Sawangfa, O., & Smith, J. S. (2010). The happiness-income paradox revisited. Proceedings of the National Academy of Sciences, 107, 22463-22468.

Frijters, P., Haisken-DeNew, J., & Shields, M. A. (2004). Money does matter! Evidence from increasing real income and life satisfaction in East Germany following reunification. American Economic Review, 94, 730-740.

Gardner, J., & Oswald, A. J. (2007). Money and mental wellbeing: A longitudinal study of medium-sized lottery wins. Journal of Health Economics, 26, 49-60.

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263-291.

Layard, R. (2006). Happiness: Lessons from a New Science. London: Penguin.

Lucas, R. E., & Schimmack, U. (2009). Income and well-being: How big is the gap between the rich and the poor? Journal of Research in Personality, 43, 75-78.

Michaud, C. M., Murray, C. J. L., & Bloom, B. R. (2001). Burden of disease: Implications for future research. JAMA-Journal of the American Medical Association, 285, 535-539.

Stevenson, B., & Wolfers, J. (2008). Economic growth and subjective well-being: Reassessing the Easterlin paradox. Brookings Papers on Economic Activity, 1-102.

Wood, A. M., Boyce, C. J., Moore, S. C., & Brown, G. D. A. (2012). An evolutionary based social rank explanation of why low income predicts mental distress: A 17 year cohort study of 30,000 people. Journal of Affective Disorders, 136, 882-888.

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