Does more money buy you more happiness

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Does more money buy you more happiness?
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http//www.authentichappiness.org/
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What Makes Us Happy?

• What doesnt
• Age, Gender, Looks, IQ
• What does
• Family Relationships
• Financial Situation
• Work
• Community and Friends
• Health
• Freedom and Values

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Effects on Happiness
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Income per head ()
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Japan
Real GDP per capita
Life satisfaction
Average life satisfaction
Real GDP per capita in constant
Year
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US
Real income per head
PERCENTAGE VERY HAPPY
Percentage very happy
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EU DATA 1995-2005
Eurobarometers 43-63.
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Habituation

• How long does it take until you get used to a
• New House
• New Car
• New Computer
• A Want becomes a Need.

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The subjective value function
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Adaptation explains the observation that utility
for income seems flat
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Adam SmithThe wealth of nations (1775, p.183)
the desire of food is limited in every man by
the narrow capacity of human stomach, but desire
of the conveniences and ornaments of buildings,
dress, equipage, and household furniture, seems
to have no limit or certain boundary.
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Mean Happiness and Real Household Income for a
Cross-Section of Americans in 1994. Source
diTella and MacCullouch (2006).
Mean happiness
Real household income per capita
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Social Comparison

• Solnick and Hemenway (1998, Table 2) asked
  students in the School of Public Health at
  Harvard to choose between living in one of two
  imaginary worlds in which prices were the same
• In the first world, you get 50,000 a year, while
  other people get 25,000 a year (on average).
• In the second world, you get 100,000 a year,
  while other people get 250,000 a year (on
  average).
• A majority of students choose the first type of
  world.

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Time_Allocation_Fig_2 Per-period Utility for
Leisure and Consumption
Basic Goods (a0) Social Relationships Family
Friends Health, Rest, Food, Safety Control
Adaptive Goods (agt0) Most Modern Consumer Goods
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Adaptation and Social Comparison Model
Extreme Adaptation r1 0 r2 c1 Partial
Adaptation r10 r2 a c1 (1-a) r1 Social
Comparison r1, r2 peer consumption
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Time_Allocation_Fig_4 Impact of Projection Bias
on time Allocation
a1 s0 p1
Consumption Plan
Time Work
Time Leisure
Optimal
Projection Bias
Projection Bias
Optimal
Optimal
Projection Bias
Period
Period
Period
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Projection Bias (p)

• Preferences depend on Comparison Levels, r
• For adaptive goods, fail to anticipate how fast r
  will move to a new level.

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Fig_3_Time Impact of Wage Rate on Total Utility
Under Projection Bias
Total Utility
Total Utility
Predicted
Predicted
Optimal
Optimal
Actual
Actual
a1 p1
a0.5 p1
Wage
Wage
Total Utility
Total Utility
Total Utility
Predicted
Predicted
Optimal
Optimal
Actual
Actual
a1 p0.5
a0.5 p0.5
Wage
Wage
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How many habits should I initiate?
Consider three symmetric goods, A, B, and
C. Alpha 0.01 it is optimal to seek variety
(A,B,C,A,B,C,) to mitigate satiation. Alpha
0.05 choose any two of the three goods,
disregard the third, and alternate between the
chosen two (A,B,A,B,A,B,). Alpha 0.1 choose
any one of the three goods, disregard the other
two, and repeat choice (A,A,A,A,A,).
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Discrete Choice
SA HA HS
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Fig_5_Time Effectiveness of Reference Level
Reframing
Optimal Time Spent in Reframing Activities
Total Utility
Effectiveness of Reframing (r)