The Surprising Research About Money and Happiness Part 1

"All I ask is the chance to prove that money can't make me happy."

~ Spike Milligan

 

Are people who make more money happier? What about people who save more? Can people be happy with very little? And how do your spending habits impact our satisfaction?

Lets explore the relationship between wealth, income, and happiness. As you'll see, there are many insights we can glean from various studies on the topic, the relationship between money and happiness isn't necessarily simple.

The Price of Happiness (about $75k)

Economists Betsey Stevenson and Justin Wolfers of the University of Michigan examined World Bank data from more than 150 countries. Not surprisingly, they concluded that the more money you have, the happier you tend to be. However, money will only make you a little happier. According to 80000hours.org, "each doubling of your income correlated with a life satisfaction 0.5 points higher on a scale of 1 to 10." In other words, doubling your income may make you only about 5% happier than you are right now.

Other studies indicate that an increase in one's income has a greater impact on happiness below a certain level. Research by Princeton University economist Angus Deaton indicates that in the U.S., $75k is a meaningful benchmark when it comes to money and happiness. Below that level, more money translates to a lot more happiness. Over $75k, increases in happiness begin to level off as income continues to climb.

Apparently, money matters more if you have very little of it, and it matters less when you have more of it.

What is the significance of $75k, more or less? It is theorized that $75k approximates the amount at which basic needs can be easily met. As Abraham Maslow's hierarchy of needs suggests, when physical needs such as food, shelter, and healthcare are not met, other needs are less important in comparison.

It may be a case of preventing sadness more than buying happiness. Scholars at Michigan State University and the University of British Columbia concluded that above a certain level, there is "no trace of a relationship between income and happiness." So while it seems that money produces happiness, the truth is that poverty tends to make people unhappy at a level far deeper than merely the struggle to pay bills.

Winning the Happiness Lottery

However, not all studies support the "more is better" theory. Perhaps at odds with other studies, a report in Social Psychological and Personality Science magazine found that the wealthier people were, the less likely they were to savor positive events. Perhaps people with the financial ability to do or purchase almost anything they want are in danger of becoming numb to simple pleasures of life.

In this 1978 landmark study, psychologists sought to answer the question, "Is Happiness Relative?" by interviewing those who had experienced notable gains in life - Illinois State lottery winners - and those who had experienced great loss: paralyzed accident victims. While the lottery winners were determined to be the happier group overall, the accident victims actually derived slightly greater joy and pleasure from everyday experiences such as enjoying time with a loved one or visiting a park on a beautiful day.

Almost everyone assumes that more money will make them happier, but that's not necessarily the case. Other studies, such as a 2008 University of California, Santa Barbara paper on "Unexpected Income Shock" found that modest-sum lottery winners (winning sums equivalent to about 8 months income) were not be measurably happier than others only six months after their windfall.

One theory as to why such windfalls don't ultimately increase happiness is the psychological concept called "happiness adaptation," articulated by Michael Norton, associate professor at Harvard Business School. In 2007, Norton co-authored a paper that sought to understand why reaching life goals - whether the dreamlike goal of winning the lottery or more common goals such as getting married - don't end up making us as happy as we anticipate. The paper concluded that people tend to get used to things - both the good and the bad - and thus our personal happiness is not significantly shifted by such accomplishments.

Perhaps Sandra Hayes, a lottery winner with a degree in psychology from Columbia, explained it best in a comment to an NBCNews.com article: "Just because you win the lottery, it does not change you as a person."

Part 2 will look at what does make you happier....