Quick Study: Money and Happiness Under the Microscope

by Laura Rowley

University of Southern California professor Richard Easterlin, the father of research on well-being, began studying happiness in the late 1960s, when happiness wasn't cool. I've interviewed him a number of times over the years.

Early in his career, Easterlin examined data on economic growth and reported happiness in a range of countries, and discovered that big jumps in growth in nations such as the United States and Japan were accompanied by declines, or only marginal increases, in reported happiness. This became known as the "Easterlin Paradox."

A Paradox Revisited

Recently, Betsey Stevenson and Justin Wolfers, two economists at the University of Pennsylvania, reexamined the data, and suggest that economic growth does indeed correlate with happiness, according to a New York Times report. They found that people in countries with higher incomes report higher life satisfaction.

National economic growth and happiness is one thing, personal wealth and happiness is something else entirely. So amid this debate, I think it's worth re-examining what studies say about money and individual well-being. Here are my conclusions:

1. Money buys moments of pleasure -- but they don't last long.

The problem is the more we have the more we want. In a separate study, Easterlin analyzed the results of a survey that asked adults about their material aspirations and achievements. People were presented with a list of items -- a lot of money, a home, a swimming pool, a vacation home, cars, travel abroad, etc. -- and asked which things fit their definition of "the good life." Then, researchers asked them to go down the list and name all the things they had. The study was conducted twice -- once in 1978 and again in 1994.

Because the two surveys were conducted 16 years apart, Easterlin was able to analyze whether people's aspirations shift as they age and their circumstances change. He found that as consumers moved through each stage of the life cycle -- early, midlife, and older years -- they generally acquired more of the goods on the list. But as they accumulated more, their aspirations for material goods also rose in proportion to the amount of things they owned.

In other words, the study offered scientific proof of the old saying "the more you have the more you want." Researchers call it the "hedonic treadmill." It means -- we quickly adapt to the improvement in our circumstances, and then seek more.

2. We constantly want more because we're bad at predicting what will make us happy.

In 2002, Daniel Kahneman of Princeton won the Nobel Prize in economics for his work in this area. A fundamental rule of economics says that people are motivated by self-interest: They know what they want, can predict the most desirable outcome, and choose the best course of action to maximize their welfare. But Kahneman and a burgeoning group of behavioral economists have found that's not always true: We don't always act rationally.

One reason is the way our brains recall experience. Kahneman had people record how they were feeling about an event in real time, and then interviewed them after the fact. He discovered their accounts didn't match. Our brains pay attention to the peak and the end of an experience, and tend to forget what happens in between.

If we only remember the peak and end of an experience, we can make poor decisions. For instance, a salesperson will remember the rush of closing a big deal, but might not remember what it cost in time away from family, lost sleep, high stress, or poor health -- so he'll repeat the behavior. A shopper will remember the thrill of buying a Louis Vuitton suitcase, but she might not remember how long or hard she had to work to pay for it (or worse, pay for the bag and the finance charges on a credit card) -- and dig herself ever-deeper in the hole. If we aren't consciously in touch with what we really value, we can make career and money decisions that make us unhappy.

3. Money might buy interesting experiences, but researchers say cheap thrills create happiness.

I recently interviewed Sonja Lyubomirsky, a psychologist at the University of California, Riverside, and author of "The How of Happiness." Her book examines research suggesting that 40 percent of our happiness is inherited, and 10 to 15 percent is based on life circumstances like money, health, where you live, whether you're married or have kids, and so on.

But the rest of well-being -- a good 45 to 50 percent -- comes from your choices: Should I work extra hours for more money, or spend that time with my friends? Should I watch television, or go running or biking? Should I go to the mall, or spend time volunteering? Should I browse through the catalogs in my mailbox, or spend that half-hour meditating on what I'm grateful for?

As you can probably guess, researchers have found it's the latter choice in each pair that promotes happiness. Everyday decisions have a huge impact on your happiness, and many of those happiness-inducing choices -- socializing, volunteering, exercising, meditating -- don't have to cost anything at all.

4. People chase money because they think it's something else.

We tend to place a lot of symbolic meaning on money. We think money is security, power, freedom, happiness, or love. Money can certainly buy us a measure of freedom or security, but money itself is none of those things. If we think money is security, we'll never amass enough to feel secure. If we think it's freedom, we'll never earn enough to be free. The problem is, instead of consciously setting and pursuing goals to create a life in which we feel free or secure, we shortcut to money as a proxy.

Tim Kasser, associate psychology professor at Knox College, and Richard Ryan of the University of Rochester have found that people who make the pursuit of money a significant goal score lower for mental health. They suffer a greater risk of depression; have more anxiety and lower self-esteem; experience more physical, behavioral, and relationship problems; and score lower on indicators testing for self-actualization and vitality (or feeling alive and vigorous). The findings were similar across different countries, income levels, and age groups.

Once we remove the emotional baggage, we can acknowledge that money is just one component to achieve our goals instead of an all-encompassing solution. If freedom is a value, we have to ask which people, qualities, and experiences have made us feel most free in the past: Where do I need to live to be around those people? What should I do for my work, and how should I spend my leisure time? How much money do I need to help me create a life with those qualities and experiences? Being as specific as possible about how to manifest these qualities in our lives will keep us from running on the hedonic treadmill.

Feel Blessed, Not Happy

Finally, there's the issue of what people mean when they tell a pollster they're "happy."

In one of my favorite studies, researchers had subjects go into a phone booth to make a call. The researchers put a quarter in the coin return of the telephone; some people find it, others don't. Immediately afterward, the researchers asked them to rate their overall satisfaction -- and it's the people who found the quarter who rate life the best.

The study underscores the importance of separating temporary euphoria from genuine happiness. I subscribe to Aristotle's notion of eudaimonia -- which is translated from the Greek as "happiness," but is probably closer to the word "flourishing." And long-term flourishing requires discipline, persistence, hard work, faith, and, most important, pursuing goals that are close to your heart and based on your personal gifts.

This isn't the smiley-face, instant-gratification kind of "happiness" that popular culture promotes. As Thomas Carlyle once said, "There is something higher than happiness, and that is blessedness."