Monday, January 29, 2007

Wealth and Aspirations for Wealth: What Makes Us Happy?

A number of studies of subjective well-being and economic status have been conducted, attempting to answer the question of whether economic prosperity also brings emotional fulfillment. Three interesting conclusions follow from this research:

1) Worldwide and within countries, well-being correlates positively with income - The map above is the first integration of research across countries that links subjective well-being (happiness, satisfaction with life) with income levels. As you can see, well-being is highest in the most economically developed nations and, as a whole, lowest in underdeveloped, third-world nations. This meshes with longitudinal research within nations that shows that well-being is lowest among individuals who are unemployed and who live at poverty income levels. People who can meet their basic needs for food, shelter, and children are understandably more happy and fulfilled than people who cannot. People also appear to experience more well-being when they are engaged in productive work.

2) Beyond a threshold level of income, increased wealth does not contribute to additional well-being - Per capita income in Germany, for instance, nearly doubled since 1970, but reported levels of well-being remained constant. Indeed, within Germany, income correlates only .11 with subjective well-being. Similar low correlations are found elsewhere in Europe and the U.S. In other words, once people can meet their basic life needs, wealth only modestly contributes to *additional* happiness. And this appears to be a function of factors such as health, quality of social relations, and the quality of government in the country. It's not that wealth doesn't matter; it's that, beyond a certain level, other variables contribute more to well-being.

3) Aspirations for wealth correlate negatively with subjective well-being - This is a very interesting finding. People tend to adapt to the income level they attain and, very often, aspire to even further wealth. The research finds that well-being is a function, not just of one's absolute income level, but also the gap between one's current level of wealth and one's desired level. When people perceive a large gap between the wealth they have and the wealth they want, their well-being is significantly diminished. In fact, the negative emotional impact of high wealth aspirations for a well-off person is every bit as large as the positive impact of economic gains for a poorer person.

One way to frame this relative to the above map is that setting wealth aspirations well above one's current level of income and savings is equivalent to taking a psychological vacation to a third-world country--particularly if the aspirer doubts his or her ability to reach those income goals. Making money is a natural goal for financial traders, but the quest for ever more lavish lifestyles is not necessarily a formula for life fulfillment and, indeed, can place us in the psychological poorhouse.

3 comments:

Anonymous said...

great post as always!

happy trading,

//fredrik

Brett Steenbarger, Ph.D. said...

Thanks Fredrik,

I hope to post more later on differences among countries and cultures in what makes people happy. It's very interesting research and quite pertinent for traders.

Brett

Sunnie said...

Interesting post! Did you ever follow up on writing about on differences among countries and cultures in what makes people happy?

I looked for it, but couldn't find it...

Thanks for your help!