The Truth About Money and Happiness

Well-being evidence has important implications for policy-making; we need to make sure the evidence is reported clearly so that the public and policy-makers alike understand what it shows about the most efficient ways to improve well-being.

Last week Betsey Stevenson and Justin Wolfers published a paper on the relationship between income and well-being that argued there was no support for the claim that "once 'basic needs' have been met, higher income is no longer associated with higher subjective well-being".

However, while an interesting paper, it does not provide evidence that striving after ever-higher levels of income is an efficient way to improve well-being. Nor does it provide evidence of a linear relationship between income and well-being - as the authors themselves say: "the relationship between well-being and income is roughly linear-log".

That three letter word - log - holds the key to properly understanding this paper. Using the logarithmic transformation of income (the 'log of income') allows the authors to plot as a straight line what is most naturally represented as a curve. This means that even though the relationship between income and well-being may be robust at higher levels of income, it is definitely not linear.

As individuals get richer, there are diminishing marginal returns to increases in income, so as an individual becomes richer and richer, income matters less and less in terms of improving their well-being. And in addition, the increases in well-being achieved from increasing income, at the high end, are dwarfed by well-being differences associated with social relationships or other things. More income might 'buy' a little more happiness, but more friends would 'buy' a lot more.

This curved shape of this income/well-being relationship is now established by a wealth of literature but, and although mentioned by the authors, the language they use - especially in the abstract - appears to underplay it, potentially leading to serious misinterpretation.

A quick scan of some recent headlines about the article confirms such fears: "Proof that money does in fact buy happiness" is the headline of one blog reporting on this study, with others including "Money Buys Happiness and You Can Never Have Too Much, New Research Says", "Money can buy happiness, says study" and "Science: Money makes you happier". These headlines are simply not good advice for many people about how to best improve their well-being.

It's not that income isn't important to well-being - it's a really key driver. But misinterpreting these results matters because if you believe that the relationship between income and well-being is linear then the implication is that, as an individual, you should always strive to earn more and more money, no matter how wealthy you already are.

And whilst log income has little psychological meaning for people - and so should not be the target for governments designing policies to maximise well-being - time does. And it's limited. This means that there are often better ways to spend our precious time to improve our well-being than by making more money - especially when you are already comfortably off. And the evidence also suggests that there would be substantial gains to the overall level of well-being of a country if wealth was redistributed from the richest people to the poorest. Politicians of all parties need to pay attention to this large body of evidence on what can lead to higher well-being.

Well-being evidence has important implications for policy-making; we need to make sure the evidence is reported clearly so that the public and policy-makers alike understand what it shows about the most efficient ways to improve well-being.

This post was written by Juliet Michaelson and Laura Stoll of the Centre for Well-being at the new economics foundation.

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