Does Money Make Us Happy?
“Money is a terrible master but an excellent servant.”
The World Happiness Report of 2019 finds that feelings of worry, sadness and anger have risen nearly 30% since 2010 across the globe. In the United States, American adults appear to be less satisfied with their lives than they were 20 years ago, despite a rising economic tide. Exhibit 1 shows how much wealth has grown in the USA since 1990. The average United States citizen can buy twice as much today as they could 30 years ago. Overall, in 2013, about 60% of the US population were better off in economic terms than in 2000.
In line with this financial growth, people in the United States think that money is more important than ever. The American Freshman Survey, which has been running since 1967 measures perceptions of university students. Findings from the 2017 survey are presented in exhibit 2 below.
What we discover from these two simple exhibits is interesting. First, having more money is viewed as more important than ever before, at least by those in American universities.
Correspondingly, the average (mean and median) US citizen has more today than in the 20th century. The prediction? People in the US should be happier than ever. Only, they aren’t. Inequality in the US has been increasing since the 1980s, with the lowest 40% of households stagnating in terms of income since 2000 (in real terms). Despite being better off overall, rising inequality probably plays a role in the unhappiness of citizens, indicating that relative wealth, not absolute wealth, matters to our happiness.
The General Social Survey in the US assess the state of general happiness in the country. Twenge (2019) finds that general happiness in the US declined in 2016 compared to the 2000s, with a significant decrease occurring in 2012. Depression, suicidal ideation, and self-harm – particularly among young women – in the US and the UK increased in this period, indicating lower psychological well-being for the iGen (born after 1995) generation compared with millennials. Factors like social media, increased television consumption and phone time are quite possibly tied to these declines (Twenge, 2019).
What’s going on? It appears that our intuition is simply wrong, having more money isn’t enough to increase our happiness, a least not by itself. How does money and happiness interact?
Happily, scientists have been studying the relationship between money and happiness for years, and there is a lot of work on this relationship. Professor of psychology Ed Diener is on of the Rockstars of happiness research. He has been dubbed “Dr. Happiness”, on account of his extensive research into subjective well-being and its potential corelates.
In 2008, Ed Diener and his son published Happiness: Unlocking the Mysteries of Psychological Wealth. In this book, the Diener father and son team tackle the issue of money and happiness, and assert that “money buys happiness, but there are important exceptions”. In general, wealthy countries tend to have happier residents than poor ones. A nation’s wealth is one of the most powerful predictors of life satisfaction in those societies. Despite this result, measuring the effect of income on individual happiness is less easy. Johnson and Krueger (2006) discovered that being satisfied with your income is only modestly correlated with its size. In other words, some people can meet their desires with less money, because they have less expensive tastes and/or more control over their finances. Individual variation in desire plays an important role in explaining why some low-income folks can be extraordinarily happy, while some of the richest appear to be permanently stressed out.
Other evidence from numerous large-scale studies (Lucas and Shimmack, 2009) replicate relatively weak correlations between income and happiness, especially at the individual level. However, these small correlations can lead to a significant average difference between high- and low-income groups. In other words, on average, money has a moderate effect on happiness, although there are numerous other important factors that contribute to happiness.
The World Happiness Report (2020), which uses the Gallup World Poll for its data, measures hundreds of the possible happiness correlates. The report outlines several explanatory variables in assessing happiness across countries. These variables may be taking credit from other factors for their effects on happiness, and there may be viscous and virtuous cycles that exist between variables. Still, the data show a robust relationship between income and happiness. According to the report, somewhere between 10 and 30 percent of the variation in happiness across countries is explained by GDP per capita, a proxy for income. However, social support appears to explain differences in happiness more powerfully than GDP per capita. Healthy life expectancy, freedom to make life choices, generosity and corruption all play important roles too.
Evidence from Diener & Biswas-Diene (2008) also shows that how you see money generally matters more than how much of it you have. The authors conducted studies on materialistic attitudes and found that wanting too much can decimate your life satisfaction. In fact, viewing money as unimportant will make you happier at every income level below about $250,000. Even after that, if you’re a materialist, your life satisfaction is likely to be only slightly higher than that of a money-hating, cave-dwelling hermit.
Another finding from research into money and happiness reveals a relationship of diminishing returns. Countries and people with very low incomes are a lot less happy than middle-income countries and people, but the rich are only slightly happier than the middle class. This makes intuitive sense. If you go hungry because you can’t afford food, or spend nights on park benches because you can’t afford rent, that’s a recipe for misery. But if you’re taking hot showers and eating McDonald’s, adding a Rolls Royce to the mix doesn’t do much for you.
Interestingly, life satisfaction climbs continuously (albeit at a diminishing rate) with larger and larger incomes, whereas emotional well-being (feeling more happy emotions and less sad emotions) does not seem to increase beyond $75,000/year (Diener & Biswas‐Diener, 2002; Kahneman & Deaton, 2010; Aknin, et al., 2018). Kahneman and Deaton (2010: 16492) state that “What the data suggest is that above a certain level of stable income, individuals’ emotional well-being is constrained by other factors in their temperament and life circumstances.” In other words, more money makes you feel good about the state of your life, but it doesn’t save you from feelings of boredom, loneliness, stress, and anxiety.
Perhaps surprisingly, research shows that we consistently overestimate how happy money will make us, and how happy it makes others (Kahneman et al., 2016, Aknin, et al., 2018). This is an important finding. If we overestimate the contribution that money makes to our happiness, we are likely to pursue it more aggressively than we should. I want to stress this point: money plays a role in our happiness, but not the most important role. In the following chapters, we will learn more about other, non-monetary factors, that can have a powerful impact on our happiness.
If money allows us to do what we want, why doesn’t it increase our happiness in expected proportions? There are two answers, both part-truths, to this question.
The first, most popular sentiment is this: things that increase happiness aren’t always for sale (or don’t cost much). This is true in many respects. I love to play football, travel with my wife, and hang out with friends. These things wouldn’t be that much better if I had an infinite pool of money (Dunn, et al., 2011).
The second answer is this: People don’t spend their money right. If they did, they would be much happier than they are currently. I mentioned I like to travel with my wife. If I win the lottery, then, I won’t buy a Ferrari, because I don’t care what car I drive. I may, however, fly first class to Greece and enjoy a luxurious holiday there. Intentional spending, according to this view, is vital to happiness (Dunn, et al., 2011).
These findings are vital to improving your happiness. Most of our purchases, whether we like to admit it or not, are the result of unconscious decisions associated with status, marketing and impulse. We are constantly at war, with adverts in every corner of our lives bombarding us with what we should want and why. We are suckers, we believe it when David Beckham promises his new fragrance will make us feel like a superstar. New iPhone? “It just works! If you don’t get it you’re not one of the real tech experts! You can’t put a price on design!” These messages hack our brains and make promises that we believe.
The pertinent question, therefore, is: How can we improve temperament and/or life circumstances to increase well-being? While it may be difficult or impossible to change a person’s natural temperament, research suggests certain behaviours help in improving positive emotional states. For example, research suggests that one of the most important predictors of happiness is social relationships. Keeping a gratitude journal or focusing on the things that you are grateful for (the ‘counting blessings intervention’) can also help people to experience more positive emotions. Additionally, by focusing on what we already have and have experienced, we reap additional enjoyment from these things and experiences. Savouring what we have in this way is also a powerful emotional tool. Other research indicates that having one’s full attention on the task-at-hand predicts enjoyment of that task. We should keep track of these positive emotional experiences, and frequently check in (mentally at first, then make a note on a phone or in a diary) with ourselves to identify what makes us feel happy.
In addition, we can defend against emotional stress by keeping an emergency fund, creating barriers between work and personal life and noting what makes us unhappy. In this way, it is possible to experience more of what we like and avoid (when doing so is not counter-productive) negative emotional states.
If money makes us happier (albeit less than we expect), why have people in wealthy nations not surged in happiness with growth in average incomes? This paradox is well researched, and at least part of the answer lies in the extra-monetary benefits of money. Money is used as a medium of exchange, but that is not its only function. Sure, money can buy us stuff. As Stephen Glenn Martin puts it:
“I love money. I love everything about it. I bought some pretty good stuff. Got me a $300 pair of socks. Got a fur sink. An electric dog polisher. A gasoline powered turtleneck sweater. And, of course, I bought some dumb stuff, too.”
But our society uses money for other things too. For one, it is the yardstick for success for many. Money confers respect, judgements of competence, social status, and personal control. The nature of these concepts, though, is that they are relative. I am respected not because I am rich, but because I am the richest. Our brains appeared hard wired to measure things in relative, not absolute terms.
Who can forget the rantings of Dudely Dursely in Harry Potter and the Socerer’s Stone (2001):
“How many are there?” he smirked, looking at his hoard of birthday presents,
“36. Counted them myself” a moustached Vernon Dudley replied, puffing up his chest,
“36?! But last year… last year I had 37!” Dudley shouted, his eyebrows furrowing in a perfectly horrible way.
In rich societies that get richer, but where inequality rises or remains steady, social status is conferred on the wealthy few. The rest of us remain unimpressive, and unhappy.
But this need not spell the emotional end for . Happiness and wealth are linked in the literature, and we should acknowledge that fact. However, there are instances of happy homeless and miserable millionaires. Moreover, the effect that money has on happiness is generally not large – despite our expectations to the contrary. In other words, as Ed Diener puts it “income appears to buy happiness, but the exchange rate isn’t great.” Socrates was right when we he said “…happiness, you see, is not found in seeking more, but in developing the capacity to enjoy less”. If you can fulfill your material desires, even with low, or even no, income, you will be happier than a rich spendthrift with insatiable tastes. P.T Barnum also hit the nail on the head, money is a terrible master, and materialistic attitudes will almost certainly diminish your life satisfaction. Money buys happiness, but it buys less than you think, and making it the center point of your life is likely to be highly counterproductive.