Everyone knows the adage "money can't buy happiness," although few of us seem to believe it. It is clear that being wealthy does not guarantee happiness; there are many who are tremendously wealthy yet entirely unhappy. Of course, anecdotal evidence is sometimes misleading, so we have written previously on what data suggests about the relationship between money and happiness.

The best-known theory on this topic is that money can buy happiness, but only up to a point. This comes from a study by two Nobel Laureates, Daniel Kahneman and Angus Deaton (2010), which found that emotional wellbeing rises with income. However, it rises logarithmically. That is, as an individual's income increases, their wellbeing increases at a slower and slower rate. And after income surpasses about $75,000 per year, Kahneman and Deaton's data suggests, wellbeing stops increasing altogether.

However, new research by Matthew Killingsworth (2021), challenges this finding: the paper, entitled "Experienced well-being rises with income, even above $75,000 per year," gives us reason to think that we should take a closer look at the link between money and happiness, with an important caveat. As we argue in this piece, a more accurate title for this paper might be: "Money barely increases happiness above $75,000 per year — unless you really value money, and even then not by much."

A Look At The Literature

In 2010, Kahneman and Deaton's study examined the link between income, emotional wellbeing, and overall life evaluation. Kahneman and Deaton's study relied on a survey of 450,000 American respondents that contained questions about emotional wellbeing, life satisfaction, and reported family income. After examining the data, the pair famously concluded that happiness remains basically unchanged once household income exceeds $75,000, though overall life evaluation keeps improving. The key conclusion is that incomes over $75,000 buy life satisfaction, but not happiness.

Chart reproduced from Kahneman and Deaton (2010)

Conversely, Killingsworth’s recent study takes advantage of technology to revisit the relationship between income and happiness. The new study used a smartphone app to periodically ask a large sample of people how they felt throughout the day on a continuous scale from “very bad” to “very good.” By contrast, the 2010 study asked people to recall how they felt in the past. As Killingsworth points out, the 2010 study’s methodology is “vulnerable to memory errors and biases in judgement.”[1] Contrary to Kahneman and Deaton’s study, Killingsworth found that happiness and life satisfaction continue to increase with household income, even after income surpasses $75,000.

Chart reproduced from Killingsworth (2021)

Does that mean that money makes a big difference in happiness and that you should go work at Goldman Sachs? Not so fast. Note that Killingsworth’s graph uses a logarithmic x-axis for income (echoing Kahneman and Deaton 2010) and the y-axis uses z-scores, a measure of standard deviation that won’t have much intuitive meaning to anyone unfamiliar with statistics. Here’s the data for experienced wellbeing, but plotted with different axes.

Three comments:

1. A doubling of income is associated with about a 1-point increase on a 0–100 scale, which seems (to our eyes) surprisingly small.

2. If we change the y-axis to display a linear relationship, this tells a different story. In fact, we see a plateauing of the relationship between income and experience wellbeing, just as found in Kahneman and Deaton (2010), but just at a later point — about $200,000 per year.

3. Perhaps the most interesting result, and which was mentioned in the body of the paper, was that the association between money and happiness was strongly moderated by individuals' answers to "How important is money to you?" This raises an interesting question about causality: do people value money because they know it makes them happier, or does it make them happier because they value it? Either way, we are left with a satisfyingly nuanced twist. While money may matter less than we expect, individuals nevertheless seem to know how much it matters for themselves compared to others.

While it is true this paper finds money is correlated with happiness for incomes past $70,000, we should be careful not to over-interpret this evidence. (Obligatory note: correlation does not imply causation). The association is quite small — perhaps underwhelmingly small — and a large part of the explanation is driven by whether people believe (or have learned) that money matters to them. So, it might be better to say: money can buy happiness, but you might be surprised at how little it buys.

If Money Doesn't Make You Happy Then You Probably Aren't Spending It Right

The previous point raises the question: doesn't it matter how people spend their money? Surely there are better and worse ways to spend it. A great paper on this topic is "If Money Doesn't Make You Happy Then You Probably Aren't Spending It Right ." In it, the authors make the following suggestions:

(1) Buy more experiences and fewer material goods (2) Use money to benefit others rather than yourself (3) Buy many small pleasures rather than fewer large ones (4) Eschew extended warranties and other forms of overpriced insurance (5) Delay consumption (6) Consider how peripheral features of your purchases may affect your day-to-day life (7) Beware of comparison shopping (8) Pay close attention to the happiness of others

As you might expect, we want to focus on the happiness from helping others. There is evidence that prosocial spending (i.e., spending money to benefit others) improves the spender's happiness. In one experiment, participants were given money and then randomly told to spend it on themselves or others. As it turns out, those who spent it on others reported higher levels of happiness at the end of the study.

So one reason to give is that it will probably make you happier than the other ways you could spend your money.

The other, probably bigger reason, is that it can substantially increase the happiness of others too.

Killingsworth's study suggests that doubling Jane's income from $500 to $1,000 increases Jane's happiness by the same amount as doubling John's income from $100,000 to $200,000 increases John's happiness. However, that $100,000 increase for John could instead be used to increase the happiness of 200 others like Jane by the same amount. That's quite a bargain!

Conclusion

Killingsworth's study has advanced our state of knowledge on the link between money and happiness through the use of a clever research design. The new data suggests that increases in happiness don't stop after an individual reaches an income of $75,000. Instead, the increases continue, and perhaps plateau, at a later point. However, this new insight doesn't significantly change the conclusions drawn after Kahneman and Deaton's study from a decade ago. It seems that chasing ever-increasing amounts of money is an ineffective way to find happiness for ourselves. On the other hand, giving to highly effective charities is a great way to make others feel happier. Those of us who live in high-income countries have an exciting opportunity to significantly improve the lives of others by pledging to donate 10% of our income over the course of our careers. Even better, we might find ourselves much happier while doing so.

Resources


Footnotes

Here, Killingsworth cites: (1) Redelmeier, D. A. and D. Kahneman, “Patients’ memories of painful medical treatments: Real-time and retrospective evaluations of two minimally invasive procedures.” Pain 66, 3–8 (1996). (2) Kahneman, D., B. L. Fredrickson, C. A. Schreiber, and D. A. Redelmeier, “When more pain is preferred to less: Adding a better end.” Psychological Science 4, 401–405 (1993). (3) Fredrickson, B. L. and D. Kahneman, “Duration neglect in retrospective evaluations of affective episodes.” Journal of Personality and Social Psychology 65, 45–55 (1993).

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If we change the y-axis to display a linear relationship, this tells a different story. In fact, we see a plateauing of the relationship between income and experience wellbeing, just as found in Kahneman and Deaton (2010), but just at a later point — about $200,000 per year.

Uhh... that shouldn't happen from just re-plotting the same data. In fact, how is it that in the original graph, there is an increase from $400,000 to $620,000, but in the new linear axis graph, there is a decrease?

A doubling of income is associated with about a 1-point increase on a 0–100 scale, which seems (to our eyes) surprisingly small.

In the context of the previous paragraph ("this doesn't mean go work at Goldman Sachs"), this seems to imply that rich people shouldn't get more money because it barely makes a difference, but this also applies to poor people as well, casting doubt on whether we should bother giving money away. I don't know if it was meant to imply the first point, but it gave me vibes of selectively interpreting the data to support a desired conclusion.

Rohin, I thought this was super weird too. Did a bit more digging and found this blog post: https://kieranhealy.org/blog/archives/2021/01/26/income-and-happiness/

if the figure is showing a subset of the two (i.e. only observations from people who answered both questions) then the z-score means across income levels will be slightly different, depending on who is excluded.

The author (who is an academic) agrees this is a bit weird, and notes "small-n noisiness at high incomes".

So overall, I see the result as plausible but not super robust. Though note that in alignment with Kahneman/Deaton, Life Satisfaction does continue to increase even as Experienced Wellbeing dips.

Nice find, thanks!

(For others: note that the linked blog post also considers things like "maybe they just uploaded the wrong data" to be a plausible explanation.)

Uhh... that shouldn't happen from just re-plotting the same data. In fact, how is it that in the original graph, there is an increase from $400,000 to $620,000, but in the new linear axis graph, there is a decrease?


So, there was a discrepancy between the data provided for the paper and the graph in the paper itself. The graph plotted above used the data provided.  I'm not sure what else to say without contacting the journal itself.

this seems to imply that rich people shouldn't get more money because it barely makes a difference, but this also applies to poor people as well, casting doubt on whether we should bother giving money away.

I don't follow this. The claim is that money makes less of a difference what one might expect, not that it makes no difference. Obviously, there are reasons for and against working at, say, Goldman Sachs besides the salary. It does follow that, if you receiving money makes less of a difference than you would expect, then you giving it to other people, and them receiving it, will also make a smaller-than-anticipated difference. But, of course, you could do something else with your money that could be more effective than giving it away as cash - bednets, deworming, therapy, etc.

One thing I would like to add is that I think it is plausible that the results might not be even close to the same if Killingsworth's study contained responses from folks living in low-income countries. For example, I wouldn't be surprised if money actually has a much stronger effect on happiness for people earning $500 ~ per year, as things like medicine, food, shelter, sanitation, etc probably bring significantly more happiness than the kinds of things bought by people that earn $400,000+ per year.

Also, even if it does make a small difference (which I find hard to believe at such a low income), you can double, triple, quadruple, etc the income of 100 people earning $500 per year for a lower cost than doubling the income of one person earning $200,000.

Since we can't directly prove this from Killingsworth's study — which the blogpost was primarily about — the assumption was that the results would be the same for low-income earners.

Thanks a lot for writing this up! I feel like having sharp cutoffs in money/happiness correlation is a priori implausible, and the extent to which EAs believed this in the past is some evidence for collective motivated reasoning in our community.

See some other loose discussion earlier. 

i don't think it's totally implausible, at least not if we believe that there is such a thing as basic needs, that people are significantly less happy if those aren't met, and that a certain amount of money (obviously allowing for some variation) allows one to fulfill them. that said, i think it's less plausible than a logarithmic relationship, but of course i say that having just read this post ...

edit: having thought about it a bit more, i can't really think of a basic need that has a sharp cutoff -- e.g. you're not either well-nourished or starving, but there are tons of points in between, and at any point money can provide marginal improvements -- so now i do think it's pretty implausible after all.

I think being wealthy can detract from welfare in other ways. Maybe people are more likely to have shallow relationships, be more scrutinized and trust others less because of their wealth. So, it's possible it would peak, but I guess $75K seems low for this.

Hmm maybe but I sort of disagree with the broader thrust. There are downsides to wealth just like there are downsides to being attractive or smart or having lots of friends or w/e, and for some individuals the downsides are actually bigger than the positives, but I would be surprised if on average the minuses are outweighed by the positives.  

I believe this more strongly if you're ignoring the causally upstream stuff on achieving those outcomes. For example I think it's more plausible that people who do extreme things to achieve wealth (imagine an investment banker working 80h/weeks) are less happy than demographic twins  who chose not to achieve such wealth (similarly people like being extremely attractive but many people find extreme dieting and exercise unfun and steroids might be bad for you). But I would find it quite implausible that people who do broadly similar things to achieve positive outcomes but are more successful at it (or are just born lucky) are on average victims of their own success (or their own luck). 

Thanks for the kind words Linch! Yes, I agree with the motivated reasoning point. I found myself pretty attached to the $75,000 anecdote (me being a fanboy for Kahneman probably contributed to this) even though it didn't feel quite right. Glad that this new paper allowed me to update while still aligning with one of my core beliefs.

I think Killingsworth's study captures the same idea that motivates me to do the GWWC pledge while being a bit more nuanced than Kahneman & Deaton's study. I really do hope this new research can enrich the EA community's view on the relationship between money and happiness.

Thank you both for writing!  Very interesting. Great team :) 

the association between money and happiness was strongly moderated by individuals' answers to "How important is money to you?" This raises an interesting question about causality: do people value money because they know it makes them happier, or does it make them happier because they value it?

I would like to know more about the differences in the happiness between the groups who answer that "How important is money to you?" question differently. Is there anything out there that I should look at? With the data you have, can you for example, plot a graph showing how the happiness of bottom quartile of money valuers (i.e., those attaching very low value to money) scales with income and compare it to the top quartile?