Econstudentlog

Income and happiness

“Recent research has begun to distinguish two aspects of subjective well-being. 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. We raise the question of whether money buys happiness, separately for these two aspects of well-being. We report an analysis of more than 450,000 responses to the Gallup-Healthways Well-Being Index, a daily survey of 1,000 US residents conducted by the Gallup Organization. We find that emotional well-being (measured by questions about emotional experiences yesterday) and life evaluation (measured by Cantril’s Self-Anchoring Scale) have different correlates. Income and education are more closely related to life evaluation, but health, care giving, loneliness, and smoking are relatively stronger predictors of daily emotions. When plotted against log income, life evaluation rises steadily. Emotional well-being also rises with log income, but there is no further progress beyond an annual income of ∼$75,000. Low income exacerbates the emotional pain associated with such misfortunes as divorce, ill health, and being alone. We conclude that high income buys life satisfaction but not happiness, and that low income is associated both with low life evaluation and low emotional well-being.”

Here’s the paper, called: ‘High income improves evaluation of life but not emotional well-being’, by Daniel Kahneman and Angus Deaton.

Income != Wealth. In general I’d argue that the income coefficient will underestimate the utility of money because of this in analyses like these, as the low income group both contains people who have significant assets and relatively low income (retirees) and people with similar incomes but no assets and/or significant debt; the latter group is more vulnerable than the former and estimating something like self-reported anxiety while completely disregarding savings in the money part of the equation is perhaps not exactly optimal (I’m almost certain it’s a data problem here, not an oversight by the authors, I’m just saying that it’s likely a problem).

You should read all of it, it’s not a long paper but it’s quite good. Here’s another sequence I found interesting:

“Although concavity is entailed by the psychophysics of quantitative dimensions, it often has been cited as evidence that people derive little or no psychological benefit from income beyond some threshold. Although this conclusion has been widely accepted in discussions of the relationship between life evaluation and gross domestic product (GDP) across nations (11–14), it is false, at least for this aspect of subjective well-being. In accordance with Weber’s Law, average national life evaluation is linear when appropriately plotted against log GDP (15); a doubling of income provides similar increments of life evaluation for countries rich and poor.” [my emphasis, US]

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September 14, 2010 - Posted by | data, economics, Psychology, studies

2 Comments »

  1. The point “income ≠ wealth” can hardly be overemphasized. It permeates public debate, and allows politicians (and economists!) to make all sorts of inane claims, and endorse and enact all kinds of idiotic policies. As you point out, data problems haunt this kind of research – income data is much more available, and thus used, even though income is a piss-poor proxy for present and/or future consumption available to economic agents.

    Another issue I think is relevant here is that this setup overweighs the perceived additional psychological benefit from additional income/wealth, but ignores the negative benefit from lost income/wealth. Meanwhile, it’s widely known (“sticky wages”? Man, I hate Keynes!) that people are reasonably happy when they get a 5% salary raise, and unreasonably unhappy (to put it mildly – more like furious, frustrated, depressed) if they get a 5% salary cut. In the investment industry, if your benchmark is up 10% this year, and you make your clients 12%, they love you. If the benchmark is down 10%, and you lose 8%, you are in deep doodoo. Do not ask me how many stupid drawdowns I have to put in models in order to prevent this. What I am trying to say, clumsily, is that an income/wealth data point does not tell you the whole story – the psychological assessment of the individual is heavily path-specific. You cannot assume monotonicity – okay, you can, but you certainly should not.

    Comment by Plamus | September 15, 2010 | Reply

  2. Plamus, as to your second point:

    When interpreting our findings, it is essential to distinguish changes from differences. Our data speak only to differences; they do not imply that people will not be happy with a raise from $100,000 to $150,000, or that they will be indifferent to an equivalent drop in income. Changes of income in the high range certainly have emotional consequences. What the data suggest is that above a certain level of stable income, individuals’ emotional well-being is constrained by other factors in their temperament and life circumstances.” [my emphasis]

    They only look at different people with different incomes and use those stats to compare ‘happiness’ – they don’t look at all at the impact of changes in income on an individual level and they make that point clear in the study, because that’s not what the study is about. In defence of the authors, there were a lot of other things they could have looked at, but they did this study, and you’d need a different study, likely with different data, to include the kind of stuff (loss aversion, ect.) you talk about – I don’t blame them for not including that stuff in their paper.

    Comment by US | September 15, 2010 | Reply


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