Money and Happiness

Published On: January 21, 2021

Written by: Ben Atwater and Matt Malick

Recently a client sent us some commentary on money and happiness.  This analysis mentioned the Daniel Kahneman and Angus Deaton study from the Center for Health and Well-Being at Princeton University.  The legendary psychologist and economist, Kahneman, published High income improves evaluation of life but not emotional well-being with Deaton in August of 2010. 

This inspired us to go back and read this major study that sought to answer the age-old question, does money buy happiness?

First, the researchers attempted to define happiness.  They identified two definitions:  emotional well-being and life evaluation.

“Emotional well-being refers to the emotional quality of an individual’s everyday experience – the frequency and intensity of experiences of joy, stress, sadness, anger and affection that make one’s life pleasant or unpleasant.  Life evaluation refers to the thoughts that people have about their life when they think about it.” 

Put simply, think of these two categories as happiness and satisfaction.  Put in the context of questions, “How happy are you these days?” and “How satisfied are you with your life?”. 

The study included 450,000 survey respondents in the years 2008 and 2009, which is interesting in and of itself, because the responses were largely during the financial crisis. 

The researchers found that an income of about $75,000*, all else being equal, is where Americans peak in terms of their emotional well-being (e.g., fascination, anxiety, enjoyment, happiness, worry).  Beyond this level of income, the needle does not move in terms of emotional satisfaction. 

Below the $75,000 level, using a log scale, there is an important correlation between the percentage increase in your income and a percentage increase in your emotional health.  Therefore, all else being equal, someone making $50,000 is significantly emotionally happier than someone making $25,000.

But according to their conclusion, someone making $150,000 is no more emotionally satisfied than someone making $75,000. 

A phenomenon called adaptation comes into play after you meet your basic needs for security.  You adapt to whatever income you make (i.e., you spend more).  For example, you become adapted to Patek Philippe watches and are no longer satisfied with Swatch watches, which can create its own kind of stress. 

At least one unrelated study has even indicated that people lose some emotional satisfaction as their incomes grow well into the six figures because people may have “a reduced ability to savor small pleasures.” 

Kahneman and Deaton conclude “that above a certain level of stable income [$75,000], individuals’ emotional well-being is constrained by other factors in their temperament and life circumstances.” 

It is quite the opposite when it comes to life evaluation (e.g., how people grade their overall “life”).  In this context, whether on a log scale or an exponential scale, the higher one’s income, the higher their life evaluation. 

Although the study does not address it head on, we think this measure of happiness is highly misleading.  Society puts a large emphasis on measuring “success” by measuring income and wealth.  Satisfaction means “fulfillment of one’s wishes, expectations, or needs.”  This sounds a lot like money, which is what many people wish for and need. 

Therefore, money provides a method of “keeping score” and “winning,” so someone with a high income might naturally conclude that they have had a satisfactory life, whether they are genuinely happy or not.  In this vein, the study does recognize “the importance of the distinction between the judgements individuals make when they think about their life and the feelings they experience as they live it.” 

Certain factors correlate positively with life evaluations and emotional well-being:  high income, health insurance, over 60 years of age and college graduates.  Other correlators are negative for life evaluations and emotional well-being: smoking, loneliness, headaches and poor health. 

The authors definitively conclude that “lack of money brings both emotional misery and low life evaluation,” not to mention increased “anger.”  However, more money does not necessarily buy more happiness. 

* The $75,000 referenced throughout this essay is in 2008-2009 dollars, not 2021 dollars.  Using the Consumer Price Index as an inflation gauge, $75,000 in December 2008 had the same buying power as $92,925.54 in today’s dollars.