Money and Happiness

It’s no secret that money is a stand-in for happiness given that is so much easier to quantify than the more elusive idea of personal wellbeing. There are many ways we delude ourselves about the relationship between money and happiness, among them is the notion of “I’ll stop slaving away at work when I reach xyz number.” Your magic number may be a salary figure or it may be a wished for dollar amount to have in the bank. Whatever it is, I can promise you that when you get there, it won’t seem like enough. You see, we are not conditioned to think of money in terms of “enough.” As one of my clients once said to me, “Doc, you can never be too rich or too skinny.”

The scientific name for this phenomenon is the “hedonic treadmill” or “hedonic adaptation,”referring to the fact that we must make more and more money to keep our level of happiness in the same place. What tends to happen is that our expectations rise and fall with our earnings (as well as other circumstances in our life), keeping our happiness at a relatively stable place. To demonstrate this effect, I’d like for you to consider two groups that seemingly have little in common – paraplegics and lottery winners.

We would hypothesize that one-year after the life-changing event, lottery winners would be much happier and paraplegics would be much sadder, right? But this is simply not the case. One year after their respective events, it makes little difference whether you are riding in a Bentley or a wheelchair – happiness levels remain relatively static . Why?

We tend to overpredict the impact of external events on our happiness. One year later, paraplegics have found out their accidents were not as catastrophic as they may have feared and have coped accordingly. Similarly, lottery winners have found out that having money brings with it a variety of complications. No amount of spending can take away some of the tough things life throws at each and every one of us. As the saying goes, “wherever you go, there you are.”

In much the same way, we tend to project forward to a hypothesized happier time, when we have more money in the bank or are making a bigger salary. The fact of the matter is, when that day arrives, we are unlikely to recognize it and will simply project forward once again, hoping in vain that something outside of ourselves will come and make it all better.

A recent Princeton study set out to answer the age-old question, “Can money buy happiness?”Their answer? Sort of . Researchers found that making little money did not cause sadness in and of itself but it did tend to heighten and exacerbate existing worries. For instance, among people who were divorced, 51% of those who made less than a thousand dollars a month reported having felt sad or stressed the previous day, whereas that number fell to 24% among those earning more than three thousand dollars a month.

Having more money seems to provide those undergoing adversity with greater security and resources for dealing with their troubles. However, the researchers found that this effect (mitigating the impact of difficulty) disappears altogether at seventy-five thousand dollars. For those making more than seventy-five thousand dollars a year, individual differences have much more to do with happiness than does money. While the study does not make any specific inferences as to why seventy-five thousand dollars is the magic number, I’d like to take a stab at it.

Most families making seventy-five thousand dollars a year have enough to live in a safe home, attend quality schools, and have appropriate leisure time. Once these basic needs are met, quality of life has less to do with buying happiness and more to do with individual attitudes. After all, someone who makes seven hundred and fifty thousand dollars can buy a faster car than someone who makes seventy-five thousand dollars, but his or her ability to get from point A to point B is not substantially improved. Once we have our basic financial needs met, the rest is up to us.

You’re Chasing the Wrong Dream

We’ve discussed that happiness does not come from chasing money or even hitting the lottery (and conversely that sadness is not borne of personal tragedy), so what does make us happy? Well, fortunately or unfortunately (depending on how well-adjusted your parents are), a great deal of happiness comes from our “hedonic set point,” which is genetically determined. A ten-year, longitudinal study of 1,093 identical twins found that between 44% and 52% of subjective well-being is accounted for by genetic factors . So, roughly half of what makes you happy is out of your control, sorry to say.

But what about the part that we can control? Of the remaining 50%, roughly 10% is due to external circumstances and a whopping 40% is due to intentional activities, or the choices we make.We discussed before how we tend to overrate the importance of the things that happen to us, and sure enough, only 10% of what makes us happy is accounted for by lucky and unlucky breaks. Eighty percent of the non-genetic components of happiness can be controlled by our attitude and by making choices that are consistent with finding true joy. The first step in this pursuit is ensuring that the goals we are setting for ourselves are consistent with finding true happiness.

If 80% of the happiness that is in our control comes from setting and working toward positive goals, what sort of goals should we be setting? Headey has found that goals focused on enriching relationships and social resources are likely to increase well-being. We connect with a number of close friends and find joy within those relationships.
On the other hand, he found that goals based around monetary achievement have a negative effect on overall well-being. Unlike friendship, which we “consume” in limited but satisfying quantities, we feel as though we can never really reach a financial goal.

Having a core group of close friends sates us; it is sufficient to meet our social needs and we do not pine for ever-greater numbers of friends. Not so with financial goals; just as we reach our former goal, the hedonic treadmill kicks in and our excitement over having “arrived” is gone in an instant. Dr. Daniel Gilbert, a happiness expert at Harvard, says that pursuing wealth at the expense of more satisfying goals has a high opportunity cost. “When people spend their effort pursuing material goods in the belief that they will bring happiness, they’re ignoring other, more effective routes to happiness. ” The simple fact is this: chasing money and material goods is an itch that our flawed psychology will never let us scratch.

Parts of this post are taken from Dr. Daniel Crosby’s book, “You’re Not That Great”, which sets forth seven counterintuitive truths for living a meaningful life.

 About the Author: Dr. Daniel Crosby is an expert in behavioral finance. His unedited truths along with his expertise and insight helped create Eastbourne Brands. Every Eastbourne Brand benefits from Dr. Crosby’s on-going relationship with Eastbourne’s founders and Managing Partner. Learn more about the relationship between your mind and your money at