Does money buy happiness after all?

A recent paper suggests that money increases happiness over a wider range of incomes than previously believed.

Does money buy you happiness?

It’s a question that arouses strong emotions. Which is why the world breathed a collective sigh of relief when Angus Deaton and Daniel Kahneman provided the data to confirm the answer the world’s great religions had provided for millennia: No.

Or at least, they found, not above a household income of $75,000 a year. And provided you’re talking about experienced happiness rather than life evaluation.

As I explain in The Life Factor e-book, research into happiness distinguishes between two types: experienced happiness and life satisfaction. Experienced happiness relates to how happy or sad you feel right now. It can be further broken down into positive affect (happiness, laughter, joy) and negative affect (sadness, anxiety, anger). Life satisfaction measures how happy you are with your life overall.

Spirituality  2 – 0  Materialism

Deaton and Kahneman’s famous research was based on US data and found that while life satisfaction increased with income across the range they considered, experienced happiness plateaued above $75,000. The explanation was that at this level of income, you had enough to avoid the bad things in life and enough to experience the good. Above this level,  the extra money can only be spent on things that don’t increase happiness (yet more stuff). Or getting the extra money increases worry and stress to an extent that offsets any happiness benefit.

A follow-up paper in 2018 by Jebb, Tay, Diener, and Oishi extended the analysis around the world using an enlarged dataset that covered a wider range of incomes. They found that the phenomenon of experienced happiness plateauing was replicated around the world. However, they found that the same occurred for life satisfaction.

In rich western countries, life satisfaction plateaued at around $140,000 a year for a household of two and $200,000 a year for a household of four. Experienced happiness plateaued at around two-thirds of these levels broadly consistent with Deaton and Kahneman’s findings. The authors concluded that Deaton and Kahneman hadn’t spotted the plateau for life satisfaction as their dataset didn’t go to high enough income levels.

Or maybe not…

But a recent paper by Matthew Killingsworth (Killingjoy?) in the Proceedings of the National Academy of Sciences pours cold water on this idealistic view of human nature. He cites three main problems with existing studies on the link between money and happiness:

  • Experienced happiness is always measured after the event, by asking people how they felt yesterday. Tricks of memory can lead to all manner of biases and inaccuracies.
  • Studies have tended to measure experienced happiness based on binary yes/no answers to questions about positive and negative emotions. This creates an in-built tendency for the data to plateau if large numbers of people answer ‘yes’ to these questions above a certain income level. They find this is indeed what happens in the data, and there is no ability to measure potential increasing strength of ‘yes’ as income increases.
  • Previous studies have suffered from sparsity of data at the highest income levels.

Killingsworth addresses these concerns in his research design, which was based on US data. Data on experienced happiness is gathered at regular intervals through the day using a phone app to ensure that it’s live. Questions about experienced happiness were asked on a continuous 0-10 rather than binary scale, allowing for discrimination at high levels of happiness. This also aligns with how life satisfaction is typically measured. Finally, a particular effort was made to recruit sufficient high income participants into the study.

Based on this enhanced research design they find that neither life satisfaction nor experienced happiness plateaus for household incomes up to $500,000, contradicting earlier findings.

What to conclude?

There are some interesting details in the data.

For lower incomes, the increase in experienced happiness with income is explained more by reduced negative emotions than increased positive emotions. For higher incomes, increases in positive emotions take over as the prime driver of the relationship. So for higher earners especially, spending on the right things to create positive emotions is important.

People’s attitude to money strongly affects how happy it makes them. Although money improved experienced happiness pretty much across the board, the impact of money on happiness was around four times as strong for people who said money was important as for those that said it was not. So expectations matter. There was no average difference: higher earners for whom money is important were happier than higher earners for whom it is not. And vice versa for low earners. By contrast, those who equated money with success were less happy than those that didn’t across the income distribution. So understanding your money type and trying to reframe associations between money and success is important.

A significant component in the relationship between money and happiness appears to be the extent of control people said they felt over their lives, which generally increases with income. But offsetting this was the fact that people feel increasingly time poor as income rises and this dampens the improvement in happiness. So using increased income to buy time is likely to help you get the best bang for buck.

But most importantly, Killingsworth’s findings certainly don’t mean we should pursue money to the exclusion of all else.

First, consistent with the findings of previous authors, the relationship between income and happiness is not linear, it’s logarithmic. In broad terms, this means that the increase in happiness from an increase in income is based on the % rather than $ increase. In other words, suppose Jill increases her income from $50,000 to $100,000. To get the same level of increase in happiness again, she must get to $200,000 (not $150,000). So increasing income leads to diminishing returns.

Second, the effects are quite small. Income explained less than 20% of the variation in life satisfaction and less than 10% for experienced happiness. The impact of adding $100,000 of income was to move around 0.1 standard deviations through the happiness distribution. This is equivalent to overtaking fewer than 5% of your compatriots in the happiness stakes. So paying even a small price in other parts of your life in order to get more money is probably not worth it.

The conclusion is the fairly obvious one. All else being equal, money makes a bit of a difference. But don’t define yourself by it and be careful to spend it the right way.