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Sunday, 3 January 2010

Money Can't Buy Happiness

Wish Carefully For You May Receive


Worse, not only does money not equal happiness, it seems that offering people money for doing things that they would otherwise do out of the goodness of their hearts can destroy their generosity. Money may not make you happy but it can sure as hell make you a miserable son of a bitch.

Framing and Focussing
A curious feature of studies that investigate happiness is that whether you think you’re happy or not is very dependent on the order in which you’re asked questions. Given that we usually think of happiness as being a state that we can independently report on this is peculiar, to say the least. Consider the two questions:
  1. How happy are you with your life in general?
  2. How many dates did you go on last month?
In Would You Be Happier If You Were Richer? Daniel Kahneman and colleagues have found that if you ask question 1 first the results of the two questions are virtually uncorrelated – whether or not you’d recently been out painting the town red made no difference to whether you felt happy or not. Reverse the question order, however, and the correlation rises to 66% - two thirds of people suddenly seem to reckon that getting lucky with a partner was important to their happiness. The other third, presumably, were happily married...

So what it looks like is that happiness is not something that we can report on independently of context – by causing the respondents to focus on one particular area the researchers can change their state of mind. This is the focusing illusion, a specific form of the behavioural bias known as framing that we looked at in Investors, You've Been Framed, where putting people in different frames can cause them to provide different answers to the same question. It's just lucky that marketeers and politicians don't like using these techniques to manipulate our behaviour.

You can stop laughing now.

Focussing and Relativity
Generally studies show a reasonable correlation in people’s minds between happiness and money. However, as you might guess, these studies draw people’s attention to the positive benefits that more money will bring – a bigger house, more holidays, better healthcare and so on. This triggers the focusing illusion which doesn’t catch the downsides – the longer working hours, greater stress, the misery of seeing your stocks fall or the lack of proper leisure time: which is possibly why more money doesn’t actually end up making people happier.

An alternative explanation is that money is relative: you compare yourself with your peers and don’t concern yourself with those not in your salary bracket. This, of course, is a perfect explanation for the one-way ratchet effect of CEO’s salaries as they compete against each other for the satisfaction of the biggest pay packet like kids squabbling over the games console.

Fancy A Nuclear Waste Site In Your Backyard?

However, this bias has other effects as well that detract from our happiness. Back in 1997 Bruno Frey and Felix Oberholzer-Gee published a paper called The Cost of Price Incentives. They used a Swiss referendum on where to locate waste sites to run a real-world experiment. Just over 50% of the people polled were willing to have the site situated in their area, recognising that the dump had to go somewhere, even though they didn’t like the idea very much.

The researchers also asked a second group how much they would need to be paid to accept the dump. Now we should expect that this second group would be more likely to agree to the dump since not only did they have the public duty responsibility of the first group they also had the lure of some loot, in rock solid Swiss francs to boot. Of course, we’d be wrong: only 25% of people accepted this offer, in spite of increasingly high rewards.

Working out exactly what’s happening here is a bit of a challenge but a reasonable guess is that the monetary question is triggering the focusing illusion. Instead of thinking about the wider social issues people get focussed on the specific financial ones and simple human altruism goes out the window. In another paper the researchers call it the "bribe effect".

Quantitative Valuation and Social Policy

Now when we consider that economists everywhere are busily constructing social policy on the basis of the economic value of any particular activity this is a major concern. Essentially behavioural finance is being used to ask questions exactly like the one the researchers asked the Swiss in order to get a quantitative valuation of any social policy. The trouble is that if you only ask people questions on a monetary basis you only get answers on a monetary basis: the idea that people will willingly give up things for free when properly engaged simply doesn’t factor into these models.

As programmers are wont to say: garbage in, garbage out. What the Swiss study shows is that while you can put a price on things money is not the only way of judging the value of something. As the researchers themselves put it:
"First, where public spirit prevails, using price incentives to muster support for the construction of a socially desirable, but locally unwanted, facility comes at a higher price than suggested by standard economic theory because these incentives tend to crowd out civic duty. Second, the use of price incentives needs to be reconsidered in all areas where intrinsic motivation can empirically be shown to be important."
Which, of course, brings us, neatly, back to happiness.

More Money, More Stress

If anything more money brings us less happiness in terms we’d really associate with feelings of contentment. Higher salaries mean longer working hours, longer commutes, more stress, less time to stop and deadhead the flowers and socialise with our friends. These aren’t the things we think of when we’re asked about whether more money would make us more cheerful.

Behavioural psychology can tell us a lot about the things we do to deprive ourselves of monies we should earn from markets but it can also point us in different directions. Acquiring great wealth in a spurious quest for happiness is a pointless and pathetic occupation. Assessing all human needs purely on a financial basis is equally corrosive.

The Value of Altrusim

The study of evolution struggles to explain the origin and nature of human altruism. In a world beset by competition altruistic behaviour should have been bred out of us: but it hasn’t been because, one presumes, the nature of co-operation has given the human being an advantage in nature’s great journey. It would be a shame if, having come so far, the culturally learned ambition to acquire more and more money destroyed our natural altruism in favour of market led solutions.

Of course, if we want to follow this approach by putting a monetary price on everything we should carefully evaluate the cost of accepting a higher salary or spending our days seeking greater returns out of stockmarkets. How much money is it worth to spend your life with an ear clamped to a Blackberry, your ass to a plane seat, your fingers to a keyboard and your eyes on a real-time ticker list? How much money is your happiness really worth?

Related Articles: The Malthusian Prophesy, Copper at Morewellham Quay, The Tragedy of the Financial Commons


  1. Your analysis, as well as the work of Kahneman et al, is just a post hoc rationalization of being in a state of "not wealthy". Not to mention that any attempt to describe what makes "people" happy based on how a research sample behaves in a controlled experiment is fundamentally flawed.

    For example, consider your own presumptions: you describe having more money in terms of having more income (thus, longer hours and more stress) rather than more wealth (more independence, a wider array of choices in life, more influence over others). You describe happiness as if it were equivalent to contentment or pleasure, when it is not equivalent to either. Pleasure and contentment are ephemeral, while happiness is not.

    Although it is rarely admitted, for many people, having increased power over others would produce a more profound sense of happiness than more travel or more time with family. And some research shows that most people would define "having enough money" strictly in terms of having more money than one's peers (often unwittingly).

    "Co-operation" is never a matter of equal partnership. One decides to "co-operate" with the IRS with as much volition as an apprehended criminal "co-operates" with the police. The goal of someone who seeks to acquire wealth is to have other people co-operate with him/her rather than forever having to co-operate with others.

    I would agree that seeking wealth with no sense of purpose is unlikely to lead to fulfillment; but, driven people almost never seek wealth without any sense of what to do with it or how they desire to use it.


    This is key, in my mind.

    Credit-card companies figured out how to get most of us to spend ourselves into debt and thereby make ourselves miserable in a world of plenty. Frugality blogs have helped a lot of people out by helping them understand the manipulation being done to them.

    I am hoping that we will see the same sort of thing take place at investing blogs in coming days.


  3. Hi,
    Thank you, Nick

  4. I mostly disagree. Here’s my take ….

    When I was a poor student-to-entry level worker, I was clearly not happy.

    Then, when I’d increased my income, along with tuition reimbursement, then my happiness factor shot up some more.

    And finally, when I got a job where I could control my hours, telecommute half the time, and still have a good deal of money left over, for both travel and coursework, I was the happiest.

    Now, my latest goal is to be able to work 1/2 that time, while completing the rest of the income stream, by trading futures/options. Once that happens, then I would have reached a pinnacle of operational happiness.

    So I don’t believe this `money doesn’t lead to happiness` sophistry. It certainly does but yes, you need some commonsense to make it work out.

    The hedonic treadmill vis-a-vis `keeping up with the Jones` is a cop out. It’s a way of selling out and being mainstream, instead of being an individual. Those are psychological hangups, money didn’t create them. They were in one’s psyche from either familial or cultural conditioning. Overcome them and you’ll see, money does give you a heck of a lot of freedom and subsequently, a great deal of happiness.