Behavioral economists have found that money can buy happiness, but only up to a limit. One landmark study published in 2010, carried out by Daniel Kahneman and Angus Deaton, concluded that around $75,000 per year is the right amount of money for someone to be comfortable and happy (in the USA).
This eternal question is a long-debated topic that remains unanswered. Those who have the means say it cannot and does not buy happiness, but those who aren’t as fortunate can’t help but feel that it will solve all their problems. How do we know who is right and who is wrong?
One place we might get some answers is in the place where economics, psychology, and biology meet – behavioral economics. Behavioral economics is the study of how humans and our psyche interact with money. So, what has the field found out about money and happiness? Let’s find out.
How much money makes us happy?
One landmark study published in 2010, carried out by Daniel Kahneman and Angus Deaton, concluded that around $75,000 per year is the right amount of money for someone to be comfortable and happy (in the USA). To arrive at this conclusion, 450,000 U.S citizens were asked how they would rate their life on a scale of 1-10 (1 being absolute worst and 10 being absolute best), as well as their incomes.
Obvious differences were observed amongst the answers from people with respect to income. U.S. citizens making less than $75,000 ranked their lives lower on well-being and reported to be more upset in stressful situations. However, as the income increased, the negative effect was less and individuals reported feeling more positive.
A new study published in Nature in 2018 updated the 2010 figures. They found $60,000-$75,000 is enough for a person to achieve emotional well-being. But a person achieves true life satisfaction if they make $95,000 a year.
There was a theory proposed in the 1940s that agrees with the findings of Daniel Kahneman known as need theory. It states that an increase in money has the strongest effect when it allows people to fulfill basic needs. These include having enough food, clothing, sanitation and shelter. Once these needs are met the additional money doesn’t affect happiness levels that much. Although that could also be because higher-order needs aren’t materialistic and are geared more towards feelings of belonging, love, esteem and developing a self-identity.
More money doesn’t always mean more happiness
Likewise, the more money a person has, the happier the person is, but only to a certain extent. Beyond a point, more money doesn’t result in a corresponding increase in happiness.
Let’s take 2 people, A and B. If A makes $50,000 a year and B makes $250,000 a year, and they both get a bonus of $5000, person A will be more appreciative of it. The reason for this is that beyond $95,000 an increase in annual income no longer improves an individual’s basic quality of life since they already have the ability to do what matters most for their emotional well-being.
However, there is one theory proposed that talks about why happiness levels don’t increase after a certain point, rather they decrease slightly. This is termed the adaptation theory, which says a rise in income will temporarily increase people’s happiness, but over time they will get used to living on a higher income, and raise their sights higher. Adapting to a new high, and chasing the next big thing can lead to dissatisfaction. As such, their happiness levels go back to what it used to be.
On the contrary, one study suggested that spending on experiential experiences instead of making materialistic purchases is likely to increase psychological satisfaction. Another study concluded that people with more financial security were happier and their higher-order needs were met easily as a result.
This doesn’t necessarily mean that if someone earns less income, they are sure to be unhappy. It’s just that there are greater chances of people going through more emotional pain and stress if they don’t earn a substantial income.
Another theory that comes into account is the social comparison theory. This theory suggests that people compare their income and achievements with their peers. So if a person’s friend is earning a higher income, that person may feel more low or upset about their situation, leading to a decrease in life satisfaction.
Differences in culture
Studies show that culture influences happiness levels too. Different cultures have different values. In cultures that value money, a higher level of income will make individuals happier.
A study reported that for Europeans, the threshold value is 27,913 Euros (around $35,000). That’s quite a difference from the American estimates. It’s because a person’s culture, personality, upbringing and life experiences influence their overall happiness levels. However, it’s hard to put an exact number on the impact of culture on a person’s happiness because people’s dispositions vary.
Similar research was further carried out in other cities too such as Turkey, where they found that Turkish citizens also reported an increase in happiness levels if they earned more money. Interestingly though, they reported that women cared less about material statuses or income levels compared to men.
A final word
Studying money’s relationship to happiness has many grey areas. One of them is the focusing illusion. By asking participants to rate their happiness along with their income, they are making participants overestimate the degree of happiness money can buy.
Now, to answer the main question, yes, money does buy happiness, but only to some extent. After a certain point, the more money you make doesn’t impact the way you feel about your life and you may start looking for other ways to find happiness. Or maybe it’s not how much you make but rather how you spend it.
Money is important to live a comfortable life and to provide necessities and comforts, along with some level of security. However, beyond a point, it cannot buy us any more happiness. In the words of Mahatma Gandhi, “The world has enough for everyone’s needs, but not everyone’s greed”.
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