In the perpetual quest for financial contentment, one question has always loomed large for investors: does more money actually equate to more happiness? This question, which has drawn starkly divergent responses from various schools of thought, has finally seen a measure of resolution, thanks to a groundbreaking study. This study is the result of a remarkable collaboration between two groups of researchers previously at odds over the answer.
The first group was spearheaded by Daniel Kahnemann, a Nobel laureate in economics from Princeton University, who in a 2010 study concluded that money does indeed increase happiness, but only up to an annual income of around $100,000 in today’s dollars. The second group, led by Matthew Killingsworth of the Wharton School at the University of Pennsylvania, argued in a 2021 study that the correlation between money and happiness extends beyond this threshold, climbing steadily with income. Until recently, these conflicting viewpoints represented the state of the art, leaving investors and commentators alike to choose between them based on their pre-existing beliefs. That was until the two camps decided to join forces in an attempt to resolve their differences, resulting in a joint study titled "Income and emotional well-being: A conflict resolved," published in the Proceedings of the National Academy of Sciences in March.
Money and Happiness: The Complex Correlation
A new study has tackled one of the most complex questions in the world of finance and economics: Does more money lead to more happiness? The research, a collaboration between two opposing camps in the debate, offers some intriguing insights.
A Collaborative Approach to an Old Debate
Daniel Kahnemann, Princeton University’s 2002 Nobel laureate in economics, in a 2010 study with Angus Deaton, found that more money correlates to greater happiness only up to an annual income of about $100,000 in today’s dollars. Beyond that, the correlation disappears. On the other hand, Matthew Killingsworth from the Wharton School at the University of Pennsylvania, in his 2021 study, argued that the correlation continues all the way up the income ladder.
The conflicting findings from both studies could have remained the status quo, but the researchers decided to pool their resources and find a common answer. Their joint findings were published in a study titled "Income and emotional well-being: A conflict resolved," in the Proceedings of the National Academy of Sciences.
The Role of Happiness in the Correlation
The crucial factor in the money-happiness correlation, as per the researchers, is a person’s inherent happiness level. For unhappy individuals, more money provides limited happiness. As Killingsworth stated, "if you’re rich and miserable, more money won’t help."
However, for happy individuals, more money correlates with more happiness, and the correlation accelerates for those earning above $100,000. This is contrary to the law of diminishing returns, suggesting a law of increasing returns for this income cohort.
The Psychological Significance of Money
While the money-happiness correlation is statistically significant, it carries limited psychological significance. The researchers reiterate that other factors besides money have a far greater impact on day-to-day happiness. To illustrate, the authors observed that the impact of a "four-fold difference in income is… less than a third as large as the effect of a headache" on a person’s feelings of happiness on a given day.
The study’s findings point to a nuanced relationship between money and happiness. While more money does correlate with greater happiness for those earning less than $100,000 annually, the relationship changes for higher earners, especially if they are inherently happy. However, it’s essential not to overlook the limited psychological significance of this correlation, as other factors play a more prominent role in influencing happiness levels. Therefore, while constructing a financial plan, one must not pursue money single-mindedly, neglecting other happiness-associated factors.