Wednesday, August 18, 2010

The Million Dollar Question

So here is the Million Dollar Question:  Does being rich make you happier?

Our culture as a whole can't agree at all on this issue.  There are plenty of sayings like 'Money can't buy you happiness' and people will regularly agree with the sentiment that the most rewarding things in their lives had nothing to do with earning money or consuming goods and yet people do spend immense portions of their lifetimes and energy chasing promotions, raises, unlikely windfalls, free stuff and questionable deals.  Our collective desire to try to accumulate money and then consume conspicuously to show it off is tremendous and it is entirely at odds with what good advice seems to suggest.

There have been studies done that have found that there is no link between money and happiness beyond a certain amount.  Those that live in real poverty are definitely less happy than the middle class but it is an often quoted fact that income beyond that which is necessary to have a safe place to live, food to eat and relative security has no happiness benefit.  I am just now reading a book called The Rational Optimist by Matt Ridley that suggests that this is dead wrong and that there is a consistent trend towards greater happiness with greater money.

There are a few things we know for sure on this topic and some things that seem muddy.  We know that people get happy very quickly when they gain a lot of money but that that effect diminishes rapidly with time and that the same thing happens in reverse with losing money.  We also know that a tremendous portion of the happiness a person gains with increased wealth is due to their relative position to others.  Having the things that a middle class person has today would make you richer than a king in times gone past but obviously no one is arguing that  everyone today is happier than nearly everyone who lived in times prior to 1900 so clearly these benefits are based hugely on your circumstances.  I have read a theory about this that seems to me to be by far the best explanation of these effects:  The idea is that once basics of food and shelter are covered the benefit of wealth on happiness is entirely based on your relative wealth to your peers.  If the people you deal with regularly are generally less wealthy than you then they will be less happy and you will be more happy.  This makes a lot of sense and meshes really well with studies that otherwise seem contradictory; if absolute wealth has no effect on happiness but relative wealth does two studies with different methodology could easily conclude that either happiness varies with wealth or it does not.

It is clear then that wealth does make the person gaining it happier but because it also takes happiness away from his peers the net effect is not positive.  So you can make yourself happy by being richer, but only by stealing happiness from the global pool.  You could achieve the same gain of happiness simply by associating with poorer people and not changing your own circumstances at all!  Of course, this all depends on a relatively prosperous society to be true.  In our society it is quite easy to support a family on 45 hours of work a week along with some chores.  Being rich does not at all mean you work less hours - those at the top of the status world regularly work more hours than the average man, which is exactly the opposite of how things work in a much less advanced society.  Back when the middle class had to work 6 days a week 14 hours a day and do without healthy food and medicine getting more money surely could gain a person happiness regardless of their peer group but the same isn't true today.

To be clear there are people around in Canada and the US today who do not meet the minimum requirements for money to no longer produce happiness in an absolute sense.  In particular homeless people, natives on reserves, people growing up in gang dominated neighborhoods and those who experience discrimination could become happier absolutely if they had more wealth.  Once you are a person who has basic freedoms guaranteed, good food, a home and a reasonable expectation of health and safety you really aren't going to gain much from gaining wealth except at the cost of others.

20 comments:

  1. I don't agree with the idea that relative wealth to your peer group is the major way that wealth determines happiness above a certain line. I think that it might be useful to think about that line and what happens above and below it.

    In today's society we see that line - the one where you have enough food to eat, you have a place to live, etc. - as a kind of zero point. We expect people living in Canada to be at that point or higher, and we call it poverty when they are not. Basically below that line is negative, above that line is positive.

    Similarly, I think it's pretty reasonable to say that we view the amount of happiness you get from meeting your basic needs as a sort of zero point. We don't think that people who are barely scraping by are happy, but rather than they are not in agony. As you dip below the line you suffer more anguish. Even if you are happy in other ways, you will almost certainly be held down by that anguish because it is a biological problem.

    And it's a biological problem for a reason. There is an obvious evolutionary pressure to have enough to eat and a safe place to sleep. In conscious organisms it is pretty safe to guess that evolutionary pressures that shaped us make themselves known through unhappiness when you don't fulfill them.

    But from an evolutionary standpoint, what we think of as a zero mark, a point where you have just barely managed to creep out of the negative, is instead the infinity mark. The needs that are met by just getting yourself our of extreme poverty in our society are the only needs that evolution ever pressured us to meet.

    I think, therefore, it is pretty reasonable to guess that the relationship between wealth and happiness above the threshold of extreme poverty is far more determined by culture and personality than it is by some overarching feature of human psychology.

    We may be looking at the problem from the wrong angle. Why are people who make $10,000,000 a year not happier than people who make $60,000 a year? It could be that the answer is because the person who makes $60,000 a year is the sort of person who is prone to be content with what they have, while the person who makes $10,000,000 is the sort to never content themselves. It's pretty reasonable to assume that being prone to be content with what you have would be very negatively correlated with having huge stacks of money. If the way that money affects your happiness has an affect on how much money you have, then it will be pretty difficulty to tease out general principles on the subject from statistics or surveys.

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  2. I think it is true that there is a real difficulty separating cause and effect in this situation in a survey. Even if people who were happier were generally wealthier, how could we know that happiness was not creating wealth, rather than the other way around? I know for certain in the sales field that a positive attitude and high energy have a dramatic effect on success, and being generally happy makes it easier to have that energy and attitude. This is all ignoring the fact that it is challenging to define happiness and get people to reliably report it in the first place. Not impossible, but it is not exactly the sort of data that is immune to interpretation and bias.

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  3. I guess that's the other problem. In recent years people have done a lot of studies to show that having children makes you less happy (unless you live in a developing country or Scandinavia). But because it's all self-reporting how-do-you-feel-right-now all they are saying is that having children means that you will have less moment-to-moment happiness through your day. For most people, it seems that the older we get the more we value a general feeling of purpose and contentedness over moment-to-moment highs. Having children seems to generally be good for the former.

    If money tends to make you happy, but being happy tends to make you less interested in driven to get more money, then it might not be any surprise that the seem to not be correlated.

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  4. Corporate PlundererAugust 18, 2010 at 4:16 PM

    This is a really, really interesting topic. I think about this a lot, so I'm going to vomit up some serious verbiage.


    First though, I think part of the problem in this context is an overly simplistic definition of "happy". It means very different things to different people, or even to the same person at different times in his/her life, particularly when asked to distill it down to a number on a survey. Emotions are complicated.

    Still, considering the relationship of money to whatever momentary definition one has for happiness does factor out some of that complexity. Based on knowing a lot of rich people, I suspect the equation looks something like:

    Happiness = Wealth - MIN(PovertyLine, (Wisdom - Wealth))

    As your wealth grows, your happiness grows, until you reach a point where you're wealthier than you know what to do with. Then you're screwed (if you don't give it away), because it's all downhill from there.


    Upon reflection, it strikes me that an excellent way to measure the numerical point of maximum happiness for a person is to look at the number at which altruism kicks in. I'll use myself as an anecdotal example here, because I'm too lazy to do actual research.

    Five years ago, I was fairly stingy, and gave just enough to charitable causes to make the most of the matching contributions of my (then) employer, and it felt strained. Since then, the amount I give out has been steadily rising, and adjusted for inflation and cost of living seems to have done so (completely unintentionally) almost in lock step with my increased earnings, leaving my take-home pay pretty constant. Last year that ticked over 30% of my net income, but I haven't felt the impact in the slightest and never even think about it.

    This year I have some unexpected expenses which change the equation significantly, and though I'm not exactly going broke I am turning down the fundraising calls (annoyance: even if you give anonymously they still call you up the next year). I don't feel poor, but I'm feeling it, and I'm right up against that exact same threshold.

    The only way I could see this behaviour pattern changing is if I have children, at which point not only will I have much greater expenses, but also be thinking of their future, which is pretty much a bottomless pit of -potential- need. Inheritance comes into play.

    Yet inheritance means less to me because my family has a tradition of leaving everything to a family foundation and squat to the next generation. (My grandfather owned a bunch of factories in the 50's, his six sons all made their own millions, etc.) I'm sure I'll do the same. I am 100% positive that this structure keeps my family together, since my uncles compete among themselves to be the biggest donor but don't actually -care-, and each generation knows it's on its own.


    Which brings me to my final point re: happiness & wealth: wisdom. Being rich is a life skill, and can be taught (or learned) just like any other. Children of poor families don't understand what to do with wealth, and the pressure and confusion makes them terribly unhappy (without any way of explaining to their peers). People who marry into wealth often self-destruct shortly thereafter. The nouveau-riche are plagued by far more than just survivor's guilt & insecurity.

    In a way it's like an extreme sport. Skiing down a black diamond is awesome and an incredible feeling. Unless you don't know what you're doing, in which case it's absolutely terrifying.



    tl;dr: "Happiness" isn't well-enough defined to quantify, and wealth only counts up to the point you understand how to leverage it. You might be able to identify that point by looking to altruism, if a person understands the concept. Being rich & happy is hard, but awesome if you figure it out.

    On the whole, I recommend cautious affluence.

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  5. I'm not sure I agree with the assessment that being rich is hard. I think that the wealthier you get, the easier everything gets. What ruins the lives of lottery winners (a shocking number of lottery winners think of winning as the worst thing that ever happened to them) is more that huge disparities in wealth can drive wedges between people, so it separates them from their friends and family. Also, being rich doesn't make things nearly *as much* easier as they imagined.

    I think for most of us getting money is one of the easiest things we do. Sure, getting a job can be really hard and really stressful, but being competent enough at a job you have that you won't get fired is downright trivial. Most of our problems are not related to getting money but related to our relationships with other people. Money doesn't solve those problems and can sometimes exacerbate them.

    If you look at groups of people who spend a lot of time together, they tend to have around the same amount of money as one another. If all your friends are rich then being rich doesn't create friction between you and them. If they are all poor then being rich is a major source of strife.

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  6. Corporate PlundererAugust 18, 2010 at 4:39 PM

    I dunno, I think the issues lottery winners face are different from those who come into wealth more gradually, and I don't really see the class division you do. The very rich are very rare so it's hard to be objective, but who you're friends with certainly seems to me to be more of a matter of happenstance and serendipity. The only son of Canada's richest family is an actor in Toronto, and his friends are also mostly actors & musicians (and the definition of poor!)

    People just have many more opportunities to meet others in the same strata, particularly in their youth.

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  7. Corporate PlundererAugust 18, 2010 at 4:43 PM

    I do agree however with the statement:

    Most of our problems are not related to getting money but related to our relationships with other people.

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  8. I would argue that wealth past a certain point is wasted as well, but that the point is much higher than generally argued. I would also argue that that point is determined by one's ability feel financially secure, not by how much buying power one has. If I had enough money to quit my job and only do whatever work I wanted to do, that would greatly increase my happiness. I would know that anything I don't want to do I wouldn't have to, and I wouldn't have to worry about being laid off in this bad economy or fired due to some mistake I make.

    Financial security.

    Also, with regards to lottery winners, many of them wind up spending it all and winding up with nothing. The idea is to spend a very small amount, and invest/save the rest and live off the interest.

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  9. The research which showed that absolute wealth did not matter but relative wealth did is called the Easterlin Paradox.

    Apparently new research with more data suggests it is false:

    http://www.nytimes.com/2008/04/16/business/16leonhardt.html?_r=1&oref=slogin

    http://freakonomics.blogs.nytimes.com/2008/04/16/the-economics-of-happiness-part-1-reassessing-the-easterlin-paradox/

    They claim that happiness (self reported) varies with the log of income.

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  10. I am not particularly sold by these articles. They quote the world map coloured by happiness as proof that the paradox does not exist, but the paradox itself posits that richer countries will be happier because less of their citizens live below the poverty line. Just because rich countries are on the whole happier is no reason to think that absolute wealth beyond entry to the middle class brings additional happiness.

    The other issue I had with the data there is that they quote people who make more than 250,000 a year being 90% very happy and people below 30,000 being 42% very happy. This also cannot refute the Easterlin Paradox because most of the people below 30,000 are in fact going to have issues paying for housing and food, which everyone agrees will lower happiness a lot.

    Happiness must increase with wealth in some ways as increased health, lifespan, freedom and leisure time all contribute substantially to happiness. The trick is whether or not people that have all those basics are less happy than people who have enough money for mansions and helicopters, and the links above don't say anything about that directly.

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  11. @snidely:

    I am not convinced that having a big income gives you financial security (though that may seem bizarre!). The income myself and Wendy have taken in over the years is actually pitiful compared to most working couples and yet we are extremely secure financially. I know lots of people who make a ton of money and would be completely ruined if they lost their job all of a sudden - they don't have savings and backup plans in place because they consume everything they make and then some. Again, being desperately poor is going to make financial security nearly impossible, and that will definitely negatively impact happiness. However, people in the middle class can be absolutely financially secure if they want to be and giving them more money doesn't change that equation.

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  12. There's another thing confounding this: it's entirely possible that the Easterlin Paradox is true *and* people are happier the more wealth they are.

    Easterlin wrote his paper, "Does Economic Growth Improve the Human Lot?" in 1974. If a typical person were to measure their relative wealth in 1974 they would most likely measure it against the people who lived near them. In 2010, a typical person has a lot of opportunity to think of their relative wealth compared to everyone else in the world. The middle-class person in a developed nation, if asked to rate their relatively unhappy life on a scale of 1 to 10, seems very likely to think to themselves that the numbers 1 through 4 are probably reserved for those who don't have adequate food or shelter and end up giving themselves a 6. Similarly, a person who feels that they are relatively happy day-to-day in a very poor area may limit their response because they are aware of the lifestyles of those who are much richer than them.

    If you judge relative wealth against the entire world (which is the universe as far as wealth is concerned) then you are pretty much judging absolute wealth. Now that the majority of people in the world have some insight into the vast variation of living conditions that exist in the world, it may be hard to ever separate relative and absolute valuations of wealth.

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  13. The idea generally goes that people aren't much affected happiness-wise by those they don't interact with regularly. The assumption I was writing under was that people generally based their happiness assessments on their peers, those people they interact with every day and consider similar to themselves. I don't think that people that are far away and unknown factor in much, but you are right that they may factor in a little. Greater knowledge of the substantial differences in lifestyles and wealth between nations might creep in there a little and make people happy to not be those guys on TV. I would expect that peers would be by far the more influential group over international unknowns, but that doesn't mean they are the entire influence. Of course, this still means that being wealthier just makes those other people unhappy even if it does make you happy so it doesn't change the situation much.

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  14. While it seemed like a good muse at the time, the idea that we are actually happier because someone is starving somewhere else in the world is, indeed, pretty far fetched.

    On the other hand, knowing what's going on on the other side of the world doesn't have to affect your happiness to affect how you answer a question about how happy you are. I think, as I said, a lot of people in wealthy nations, would be hesitant to rate their lives on the bottom half of a 1 to 10 scale for fear of seeming like whiny idiots who have no clue that other people are starving AIDs refugees.

    I actually think the idea that you are happier the wealthier you are relative to your close friends and family, or even your neighbors and co-workers is completely ridiculous. Some people will be happier when they are richer than those around them, while other people will become happier and happier as the wealth of their peers increases.

    Your spouse is probably the person who most affects your happiness, but surely you don't get happier as your spouse gets poorer. Obviously for most of us with spouses there is no difference between the wealth of our spouse and our own wealth, so that's a little facetious. But while my financial fortunes are very closely tied to those of my wife, my wellbeing in general is very closely tied to that of some of my close friends. If something good happens to them then something good happens to me. I generally think of good things happening to *anyone* as good (with the exception of a handful of people who I single out to despise). I don't think that in this regard I am all that weird.

    But also, while I haven't read it all, I think the articles Pounder linked provide a much stronger case than you give them credit for. They don't draw conclusions from a coloured map of the world - one of them has a link to the paper in question which is 102 pages of analysis. The map is just for show. Easterlin says that this analysis isn't enough by itself to overturn his conclusion, but doesn't really offer a defense of his original conclusion either, saying that he was open to it being disproved.

    It would be very hard to believe, unless happiness is hardwired into you genetically, that money has no effect at all on happiness. It seems a pretty good guess it would have a positive one. To be honest, happiness increasing logarithmically with money makes a lot of sense to me.

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  15. Your Peers and your close friends are a different set of people. There are lots of coworkers, neighbours, relatives and friends of friends who we aren't especially concerned about but whose lifestyles are very well known to us. Most people get a lot of their innate sense of normal from these webs of connections and that is where the idea that their sense of their own success lies. If I live in a neighbourhood where everyone owns a Lambourghini and I can barely afford my Civic I will be reminded every time I go outside that everyone I can see is more successful than me. The fact that 4 blocks away is a subsidized housing complex where people mostly don't have cars at all doesn't affect me nearly as much as who I see every day.

    If you live in an apartment and ignore your neighbours, don't socialize much at work and rarely see relatives your perspective would be much different since nearly everyone you have experience with is a close friend whose well being you care about. I am certainly willing to admit that that particular lifestyle (which both Sthenno and I share) leads itself to much less comparison with others we don't care much about and should in theory reduce that money jealousy a lot. That said, our lifestyle is not universal and owning a house, going to bars for entertainment and doing some obligatory work socializing are good examples of things that will bring a lot of random people into your network who welfare you don't care about any more than random.dude.

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  16. You know, I'm going to suggest a different theory entirely.

    I would posit that externally-influenced happiness is best measured as a position on a scale, with endpoints set by life experience. Consider the worst things have ever been, and the best, and your happiness is a relative position on that gradient.

    Get laid off, lose your health and have your wife run away with your dog? If you recover from that and get a job/health/wife/dog back, you'll end up much happier than before at the same state. Similarly, make a one-time windfall and live big for a few months, and it'll sure hurt to land back at the baseline.


    This theory does not contraindicate the peer-group wealth theory presented here though.

    In the absence of personal experience of course, all we have to go on is the experiences of our close peers. If they're generally better-off than we are, then the upper end of our scale is set by their range, and we're relatively lower. If they're generally worse-off, then the same applies in reverse.

    I believe this explains outliers in a system like this one. It also explains how some of the happiest people I know are the ones who have survived the toughest histories, independent of their current living conditions.

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  17. I definitely buy the theory that happiness is based very much on life experiences. Having seen tough times and 'seen only darkness before you' grants perspective and can make small frustrations seem much less significant. On the other hand having only seen the best life has to offer is going to make any small setback seem like the worst thing that has ever happened. I talked some about this in previous posts about raising children in particular - I don't want Elli to avoid all pain and suffering, in fact I want her to have hard times and sad, desperate moments because those things create compassion for others and appreciation for good things.

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  18. @ Sky:

    Life experience only needs to be seen first-hand though, not necessarily experienced directly. You can get a similar perspective by just being around people who face challenges in their lives.

    It's more incentive to spend time in (metaphorical) soup kitchens in our youth, IMHO. In a way, it's the selfish payoff of volounteering.

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  19. I agree that seeing people in terrible circumstances can grant perspective, but I think it does not grant compassion. Being at the very bottom and seeing no way out lets you understand the way someone desperate feels and no amount of exposure to someone else's suffering will accomplish that same aim. I surely think that everyone would do better to be exposed to all kinds of situations, particularly including contact with people who are in dire straits, but I don't agree that those second hand experiences have the same effect as being there yourself.

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  20. I think that empathizing with other people is a skill you can learn, and only being able to understand how people feel if you have actually been in that position before sort of indicates a lack of that skill. I don't really know how to teach it, but some people are obviously better at it than others, and it's hard to believe that you are just born with it.

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