This much money will buy you happiness

My happiness level is 7.

Economists have a way of taking the joy out of joy. That’s the first thought that crossed my mind when I read a study by David Blanchflower of Dartmouth and Andrew Oswald of the University of Warwick that talked about “happiness equations” and “happiness-maximizing numbers”. Nothing like an economist to take the mysterious pleasures of life and break it down into cold figures.

And they’ve been doing it a lot lately. The “pursuit of happiness”, long the purview of psychologists, has been taken up as a serious topic of discussion by economists just in the last couple decades. They’ve discovered that in most cases, we have a poor sense of what makes us feel good about life. We spend $40,000 on a new car, when we should have really spent $50 on a couple gloves and a baseball to play catch with our kids.

Luckily, economists have taken it upon themselves to study happiness in a measurable way, and their results are consistently surprising and enlightening. Here are a few conclusions drawn in the last decade that shed just a little light on what makes us satisfied.

More sex makes you more happy.

Wipe that smirk off your face. I disagree that this falls into the “most obvious study ever” camp. The Blanchflower/Oswald study’s major conclusion might have seemed predictable, but it’s the little details they reveal that are fascinating. First, and most obviously, the amount of sex you have strongly affects how happy you are, and the effect gets even stronger if you’re highly educated.

But check out their other findings. The effect doesn’t change if you’re gay. And the “happiness-maximizing number” of sexual partners you should have in a year is 1. That is, sleeping around does not make you happier. And I also wonder if this is just means married people or people in monogamous relationships are happier.

The authors also explored whether having more money bought you more sex or sexual partners—thus indirectly upping happiness—and found no correlation. As Paul McCartney would say, money can’t buy me love.

Money might make you more happy if you get paid hourly.

At least, that’s what a couple economists from Stanford and the University of Toronto think. In their evaluation of four separate studies (two from the U.S.), they found that workers were more likely to think about how much they got paid when asked how happy they were if they got paid by the hour.

That doesn’t necessarily mean the hourly workers were happier, just that they cared about their pay more than the salaried workers, even when controlling for demographic factors. Another interesting tidbit, when the surveyors asked the salaried workers to calculate their effective hourly wage, the money variable became more important to them too.

I recently highlighted a post from Gen Y Wealth in the Carnival of Personal Finance that spoke to this money/time issue in a great, succinct way. The author concluded that he cared much more about his time doubling than his income doubling—a sentiment that I know tons of newly minted college grads from his generation feel. It dovetails nicely into the hourly wage study. If you know your hourly wage, you also know what exactly your “payment” of an hour of time buys you in return. In a world where time is paramount, that ironically could make your hourly wage very important to you.

Buying experiences beats buying material things, but only if the purchase turns out well.

This has been a popular yarn on blogs and in the press for a while. Instead of wasting your money on, say, a Nintendo Wii and flatscreen television, use it to buy a great vacation to the pyramids or karate lessons. You’ll leave with memories you can cherish a lifetime, while that TV will just break and have to be replaced in a few years.

Well, not so fast. It turns out, when measuring the effect of material or experiential purchases on happiness, economists found it matters a lot how well those purchases turned out. If an experience was positive (i.e. you became a black-belt and lost 20 pounds), those surveyed reported a greater level of happiness than if they made a great purchase (i.e. the flatscreen TV totally impressed your friends.).

But if an experience was negative (Say, you broke your leg and got beat up weekly), it had a greater negative impact than a bad purchase (The TV was a lemon). Why? Economists think it’s simply because you’re more personally caught up in an experience and that’s what drives its magnified effect on your happiness. So it’s not that an experience makes you happier, it’s that you care about it more, whether it turns out bad or good. A lifetime of bad experiences can indeed make one miserable.

The difference between experiencing happiness and remembering happiness

In a lecture in February, Nobel prizewinning psychologist Daniel Kahneman recounted a story told by someone after one of his previous lectures. The guy had listened to a recording of a symphony and thoroughly enjoyed it. But toward the end of the recording, there was a dreadful screeching sound, and the guy said, “It ruined the whole thing for me.”

Here’s the lecture, which is well worth a watch:

Kahneman makes the point that the screeching noise didn’t “ruin everything.” After all, the guy had enjoyed 10 minutes (or whatever) of the symphony before the screech hit. What it had done, however, was ruin his memory of the symphony. So while the experience was great, the memory of the experience was tarnished.

What does this mean for happiness? That you’re really broken into two selves. There’s the “experiencing” self, who lives in the present and takes pleasures or pain as you get it. And there’s the remembering self, who looks back on his life and judges whether he is satisfied or not. What makes the remembering self happy or unhappy? Significant moments and the ending. If that guy had heard the screech first and finished with a glorious crescendo, his memory of the experience would be much more positive.

And that leads to the answer to our banner question…

The income that will buy you happiness.

Of course, now we know we have to distinguish between what kinds of happiness—experiential or remembering—we’re talking about. The answer is different for each.

For experiential happiness, the answer is succinct: $60,000. That’s according to a Gallup survey of more than 600,000 Americans. Below $60k, we get progressively unhappier. But above it, happiness just about follows a flat line.

But for remembering happiness—that is, how satisfied we are with our lives when we look back on it—happiness continues to increase as your income goes up. Looking for that six-figure income isn’t such a bad thing after all.

To say that the field of happiness economics is “developing” is an understatement, and I can’t think of another area that could possibly be more directly important to the way we think about money.

Tagged as: behavioral finance, economics, happiness