Tuesday, March 07, 2006

Will Money Make You Happy?

Much like MIT has Harvard just down the street, ETH Zurich has the University of Zurich just across the street. ETH students like myself know that the 'Uni' has cuter girls and better food.

Sometimes, they have more interesting research, too, such as this dissertation (in German) by Alois Stutzer, which contains a chapter on whether higher income leads to happiness. Without going into much detail, I want to quickly show two very interesting charts.

Income vs. Happiness

In our ever-more materialistic society, it seems like having more income should automatically lead to more happiness. This chart shows the responses of US inhabitants when asked to rate their happiness into the categories of "not too happy", "happy", and "very happy".

The number of people answering "not too happy" drops from 23% for the lowest incomes to 6% for the richest households, while the "very happy" answers rise from 16% to 44%.

This is pretty strong evidence for the "money will make you happy" theory, but there is also contradicting data: The dissertation mentions another study for Switzerland in 1992-94 where happiness surprisingly drops from the second-highest to the highest income class.

Today, some economists believe that the relationship between the two is actually concave. I find this assumption very reasonable: When your income is $10'000, you'll be much happier about an addition hundred bucks than when you're pulling a million dollars each year. In jargon, the marginal utility of extra income decreases at higher levels.

Another important point is that individuals often compare their income with that of their peers. People whose reference group has higher earnings than themselves tend to be less happy than those surrounded by equals.

The Hedonistic Treadmill

Between 1946 and 1991, the per-capita income in the US rose by a factor of 2.5, from $11'000 to $27'000. (This is in 1996 dollars, so inflation is factored out.) At the same time, the average "happiness rating" dropped from 2.4 to 2.2.

Why is this? Stutzer argues that it's due to an effect called 'aspiration adaptation': As their income rises, people continuously adjust their ambitions and physically get used to the pleasures of higher income.

When an employee gets a raise, it instantly leads to a higher level of happiness. Over time, this employee will get used to the higher compensation, and return to the former level of happiness.

This phenomenon is dubbed the "hedonistic treadmill" and explains why the continuous rise in incomes and comforts was barely enough to keep happiness levels constant in the US.

It is the reason why people will always want more. When you win a Nobel prize or a gold medal at the Olympics, you'll first be very joyful. After some time, these winners will start comparing themselves to others who were even more successful: Marie Curie, who won two Nobel prizes, or Marc Spitz, who won 7 gold medals at the Munich Olympics. Better watch out for this when you get that call from Stockholm.

The Answer

In summary, I believe the answer to "Will more money make you happier?" is "Yes, but after a while you'll get used to it."


F said...

"If only we'd stop trying to be happy we could have a pretty good time."
- Edith Wharton

LT said...

I'd like to see the Swiss numbers on this, not just same old American stats we already know about. How does happiness correlate to your tax rate, hmm?

Gabor said...

Swiss numbers are on page 78 of the dissertation I mentioned.

Income (CHF per month); Happiness rating
< 2000; 7.98
2000-3000; 8.17
3000-4000; 8.24
4000-5000; 8.49
> 5000; 8.45

Goes up nicely for the bottom 4 categories and drops for the highest-income class.