Tuesday, August 4, 2009

Mo' Money, Mo' Problems?

In yesterday's Dinosaur Comics, T-Rex ponders a fairly important debate, namely the relationship between money and happiness. The first thing to consider here is what is meant by "happiness." It is a general tenet of economics, for instance, that more money or disposable income (or any sort of resource that augments a consumer's purchasing power) leads to an increase in satisfaction. Economists refer to this measure of satisfaction or desirability as utility. That is to say, utility functions of money are generally regarded by economists as being increasing functions (though not necessarily strictly increasing).

The point that T-Rex raises is that money might affect happiness in varying degrees depending on the levels of income. For example, he postulates that awarding enough money to lower-income individuals such that they could purchase food or or clothes for their children, where they could not previously, would increase their happiness levels. However, he also notes that billionaires are not uniformly happy and that affording more money to such billionaires might not increase their happiness levels by as large a magnitude as it would for the lower-income populations.

Within the framework of economics, this phenomenon is known as diminishing marginal utility (the marginal utility decreases as money increases) and implies that the utility function of money is both nonlinear and concave as the following graph shows:

reprinted from embracingchaos.com

Of course, this curve need not always be the case. In fact, the notion of risk plays quite a significant role in determining the value of money towards satisfaction or utility. The above graph implies that an individual is risk-averse. However, an individual that is risk-seeking would actually derive more marginal happiness from increases in money. In other words, the individual is more willing to gamble for the possibility of large payoffs than receiving a lesser amount of money for certain. Unlike the above graph, a risk-seeking individual would have a convex utility function.

Indeed, this is all theoretical and in reality happiness can take a meaning that is quite distinct from what economists have identified as utility. Moreover, the factors influencing happiness are still relatively uncertain and consequently happiness is pretty difficult to measure. For someone like T-Rex, it's fairly simple: stomping on houses and X-box equals happiness. But for Utahraptor, it might be something else entirely. Like negating T-Rex's arguments.

So, what then are the empirical results of the relationship between money and happiness? According to one study from 2001 in the UK, money can apparently buy happiness:

We find that, as theory predicts, a windfall of money in year t is followed by lower mental stress and higher reported happiness. As a conservative estimate, a windfall of 50,000 pounds (75,000 US dollars) improves mental wellbeing between 0.1 and 0.3 standard deviations.

This study seems interesting in that it uses mental stress and psychological health as measures of happiness. It also follows individuals longitudinally, thereby gauging their happiness levels over a period of time. Although, I believe the study is only limited to two years after the sample, possibly suggesting that people might adjust to some baseline level of happiness after receiving monetary windfalls.

Here is something more recent by Justin Wolfers and Betsey Stevenson at the University of Pennsylvania. Here is a NYTimes summary of the research and here is the Freakonomics Blog. In this paper, it is argued that self-reported measures of happiness rise with income not only within a society, but on a more macro level between poorer and richer countries (rejecting the notable Easterlin Paradox, whichargues that there is no link between a society's economic development and well-being).

I am not too familiar with the major research on money and happiness, so I would love if the readers could point me to some of the bigger studies. It is a fascinating subject. But as of my quick reading, T-Rex's (and Notorious BIG's) assertion that Mo' Money == Mo' Problems seems unlikely overall (assuming problems lead to unhappiness).



26 comments:

Yi said...

Happiness is a state of mind/feeling that is conjured up by a multitude of things. Hence money is one of the factors. You should run some regression analysis, using money as one of the beta amongst other things, and happiness as the dependent variable. Everyone should produce a different regression, and u can weigh in the average.

Anonymous said...

Money and well being may make you feel content, but not necessarily happy.

Anonymous said...

Some people like to say:

Money can't by you happiness, but it can make misery more bearable.

ShadowBanker said...

Yi - There have been so many studies on happiness and money, I doubt me running a few regressions would add much to the mix.

Anonymous - Indeed, the definition of happiness is fungible.

Andy said...

I think the "mo money mo problems" meme is better explained through a more philosophical approach.

Let's take a hypothetical wealthy man and a hypothetical hungry man. The wealthy man has the following problems when he thinks about this evening:
1) I don't know which supermodel I want to have sex with tonight.
2) I don't know which room in my mansion to have sex with said supermodel.
3) I don't know which expensive champagne to pour on said supermodel while we are having sex.
These concerns could truly stress the wealthy man. And we haven't even gotten to tomorrow or dinner, or any of the infinite possibilities the wealthy man has available to him.

Now the hungry man has only one problem - he is hungry. His consciousness is probably not thinking of any other issue he might face. When your basic survival is at risk, the brain is really good at shutting out anything else that might distract you.

Joshua said...

A minor mistake:

You've graphed money vs. utility with a log-log scale. In this context, diminishing marginal utility corresponds to the graph having a slope less than one, not to the graph being concave. So actually, the utility curve you gave has increasing marginal utility up to $100,000-$1,000,000 or so, at which point the slope drops below one and you have diminishing marginal utility.

Perhaps you meant to have non-logarithmic axes?

The Ridger, FCD said...

The only incurable troubles of the rich are the troubles that money can't cure
But those are the troubles that are twice as bad when you're poor.
(Ogden Nash)

Matt said...

I don't understand your comment about how risk-seeking affects marginal utility.

As a non-rigorous example, imagine three individuals who each find a $50 bill on the sidewalk: a recent graduate with an income of $26,500/yr, a middle-class earner with an income of $45,000/yr, and a rich guy who makes $750,000. It's pretty obvious which one of those three is going to get the biggest happiness boost from that extra $50, and I don't think the answer changes just because the recent graduate likes to ride his motorcycle without a helmet.

A masochist might have a convex marginal utility curve, but even that's kind of a red herring -- $50 will still improve a poor masochist's life more than a rich masochist, the only difference is that they're unhappy about it.

E said...

Matt: Youre misinterpreting the economic notion of risk. Imagine a straight line drawn between any two points on the utility function. Each endpoint represents some amount of money. Based on the relative weight of each amount (which is determined by the gamble), the expected payoff is going to be somewhere in between those two points, and the associated expected utility of the gamble is going to be the corresponding point on the Y axis.

Now if someone is risk averse, the corresponding utility of the expected value of the gamble will always be above the expected utility of the gamble, because the function is concave. So essentially U[E(x)]>E[U(x)], meaning you always prefer the sure thing.

Moreover, the level of risk aversion someone displays determines the degree of concavity, which determines marginal utility. If this is confusing look at this graph:

http://www.emeraldinsight.com/fig/1120170403001.png

and do the thought experiment again.

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Wallis said...

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Margaret

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Anonymous said...

I think that when thinking about the whole happiness and money relation, you should take into account Maslow's hierarchy of needs. I think you could also apply it to an earlier post you made about what supervillains would do once they took over the world. Sure, it has it's criticisms, but it could be debate about and expanded upon. http://en.wikipedia.org/wiki/Heirarchy_of_needs

ShadowBanker said...

Andy - I think you might be framing the issue in a different way. I don't think it is necessarily wealthy vs. hungry. How about wealthy vs. not wealthy? The wealthy has to solve those dilemmas you addressed, but the unwealthy has to figure out how he's going to buy food, how he is going to purchase a college education for his hypothetical kids, how he's going to get health insurance, etc. etc.

The Ridger - "Money can't buy knives" - Surf Ninjas

Matt - See E's comment.

Wallis - Thank you so much!

Anonymous - Thanks! This could definitely be a subject for discussion here. Though of course some villains would rather satisfy their self-actualization and esteem needs than their basic physiological ones. See the Joker!

ThinkAfrica said...

"relative wealth disparity" studies are up this alley, they are google-able. Googlable. Googlible. Gooblebibel.

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