Friday, October 31, 2014

Does Greater Wealth Make Us Happier?

Traders work hard to make money, but is Franklin correct?  Will increasing wealth bring increasing happiness?  It turns out that the evidence is somewhat mixed and in some surprising ways.

The research of Diener and colleagues suggests that satisfaction with one's country is a strong positive predictor of individual life satisfaction, particularly among impoverished people.  As people gain wealth, their life conditions are more likely to be predictive of their level of satisfaction.  Across countries, high income, individualism, human rights, and social equality are significantly and positively correlated with one another and all of them are predictive of overall personal well-being.  

A research review from Compton and Hoffman finds that living in a wealthier country and having greater wealth within that country are positively predictive of happiness.  There is some evidence that this relationship is curvilinear:  money matters more to people who have little of it than to people who already possess a high income.  Kahneman and Deaton found that, once annual incomes exceed about $75,000 in 2010 USD, additional income did not contribute greatly to additional happiness.  Interestingly, however, additional income did contribute to greater overall life satisfaction.  Happiness in terms of emotional state was more impacted by factors such as health status and relationship quality.       

More recent work by Stevenson and Wolfers finds no income level at which increased wealth stops contributing to greater happiness.  As Susan Adams points out, however, this finding also may depend on how happiness is measured.  When happiness is viewed as life satisfaction, increased wealth is more likely to contribute to higher happiness across income levels than if happiness is viewed purely as an emotional state.

A curve ball in all these findings is that the research tends to look at correlations, not necessarily causal relationships.  Diener and Biswas-Diener suggest the counter hypothesis that happier people are more likely to be successful and hence wealthy!  Given what we know about subjective well-being and productivity, that is not a far-fetched hypothesis.  People who are satisfied with their lives are more likely to invest themselves in their life's endeavors; they are also more likely to be physically healthy

In short, it may well be the case that there is a mutually reinforcing relationship between happiness-as-life-satisfaction and wealth.  To the degree that wealth accompanies advancement within a profession or society, it can be expected to contribute to well-being.  To the degree that well-being energizes work efforts, it can be expected to contribute to the success of our labors and increased economic success.  A happy and satisfying life can be expected to contribute to investment and trading success as much as the reverse.

Further Reading:  Success Starts With Making Your Bed