Personal Finance 1307

It is the age old question on whether money does buy happiness.  We are now getting enough data to start gaining insights into this question. 

Most of us feel that we would be much happier if our financial situation improved.  Who wouldn’t feel happier driving around in a brand new Ferrari or Lamborghini?

Undoubtedly, having money can reduce many of the daily stresses in our lives. In 1974, Professor Richard Easterlin put forth one of the first theories regarding happiness and money. In his theory Professor Easterlin proposed that:

1.   Within a country such as the United States or Mexico, richer people were happier than poorer people.

2.   However, people in the richer country such as the United States were not necessarily happier than their poorer neighbors in Mexico.

3.   This theory that the happiness and money relationship was only relevant within a country and not across countries was called the Easterlin Paradox.

Based on this theory, the key to happiness was not how much money you had but how you ranked relative to your neighbors within your country.

So, you could be very poor but as long as you were richer than your neighbors, you were on average happier than them.

Other famous economist proposed theories of the relationship between money and happiness.

Professor Richard Layard of the prestigious London School of Economics proposed that once we had enough money to meet our basic needs such as those towards the bottom of Maslow`s Hierarchy of needs, additional money did not make us that much happier.  According to him, happiness levels topped with very additional money.  So, one could not become that much happier by making larger and larger sums of money.

Other studies found some evidence to support limits on the relationship between money and happiness.

However, in 2008, University of Michigan Professors Betsey Stevenson and Justin Wolfers provided research that contradicted the Easterlin Paradox, Professor Layard’s theories and other researchers that claimed there was a limit to how much happiness money can buy.

Professors Stevenson and Wolfers used 2007 Gallup Poll Survey data from 155 countries to conduct the most extensive research on the relationship between money and happiness to that date.

Stevenson and Wolfers in their research found that:

o    Richer people as a whole are more satisfied than poorer people.

o    There is no magic amount of money where happiness stops increasing

o    The richer a person gets the happier they become

o    Almost all those surveyed making over $500,000 a year report being very happy

o    Only 35% of people making less than $35,000 a year reported being very happy

 

Can we rectify the differences between the current research by Professors Stevenson and Wolfers with the previous research done by other Economist?

After reading much of this research, it is clear that at this time in modern civilization there is a strong relationship between money and happiness and the more money we make the happier we seem to be.

The important question we need to answer now is why is this the case?  What is it about having more money makes us happier and the more money we get the happier we are?

First, it is not clear to me that the money is the only source of the happiness reported by rich people.  People become rich by having ideas that they pursue to create a business.

That is they pursue their dreams while many people don’t; choosing to just work the traditional 8 to 5 job and forego the starting of a business and the risks and challenges that entails.

The accomplishments and success along the way makes these people rich but at the same time their achievements make them more satisfied and happier with their lives.  More success brings more happiness and also brings more money.

So, achievement and success may be causing the happiness reported by rich people and not so much the money they have.

Second, Society has been through a lot of changes since Professor Easterlin’s original theory.

Since 1974 there have been many major changes in civilization.

o    Global television networks with reality shows about the super-rich

o    Global advertising of all kinds of consumer items

o    The internet in almost every city in the world

o    Smart phones able to access the internet and all it has to offer

o    Facebook, Instagram and countless other social media sites

o    Online shopping networks selling merchandise commercially

o    The spread of Multinational Corporations to every part of the globe

o    Large new shopping malls with

As a consequence, almost everyone in the world sees how the rich live.  They see these super rich people on television, in the movies and on the internet.

So, no longer do people measure their financial success just by looking at their neighbors but by looking at the money everyone else in the world has.

The realization that there are many very wealthy people out there living lifestyles that most of the world’s close to 8 billion people can only dream of undoubtedly makes them feel less happy and satisfied with their lives and the amount of money they have.

Therefore additional money does not make us happier as much as not having enough makes us unhappier.

Based on the above research and discussion, what can we do about such a strong societal relationship that has developed between money and happiness in our personal lives?

1.   Realize that it may not be the additional money that is making us happier

2.   Pursue careers and dreams that make us feel satisfied and happy

3.   Plan our personal finances so that we accumulate more money over time for both security and possibly happiness

4.   Work to overcome our jealousy of those far wealthier than us and use their success as an inspiration to us

5.   Get off the consumer treadmill and quit spending money we don’t have on all of these things we want but don’t really need.

New York Time's Some A Formula for Happiness

Ramez Naam’s Life Satisfaction and Income

I Can Has Science’s Actually, Money Does Buy Happiness