4 min read

Does money make you happy?

Does money make you happy?
Money makes Scrooge McDuck very, very happy.

Ah, the age-old question: does money buy you happiness? The general consensus is yes – to an extent. For example, surely the happiness a person gets from their billionth dollar is less than what they derived from their first dollar?

Nobel Prize winners Daniel Kahneman and Angus Deaton (2010) formalised this idea using a survey of more than 450,000 responses from 1,000 people, concluding that:

“Beyond ~$75,000 [~$105,000 in 2023 dollars] in the contemporary United States, however, higher income is neither the road to experienced happiness nor the road to the relief of unhappiness or stress, although higher income continues to improve individuals’ life evaluations.”

Science settled, right? Not quite. A decade later, Matthew Killingsworth (2021) re-examined the question with a dataset of “over one million real-time reports”, finding that:

“[E]xperienced well-being rises linearly with log income, with an equally steep slope above $80,000 as below it. This suggests that higher incomes may still have potential to improve people’s day-to-day well-being, rather than having already reached a plateau for many people in wealthy countries.”

Nothing is ever truly settled in the social sciences, and clearly one of these two papers had to be wrong. Thankfully, Kahneman and Killingsworth, along with Barbara Mellers from the University of Pennsylvania, got together to discuss their contrary findings and reanalyse the sampling data. Full credit goes to Kahneman for revisiting his published paper; he certainly didn’t have to! The social sciences could certainly use more authors willing to support the replication of their work before sweeping conclusions are drawn (and reported confidently by the media).

Turning to their results, it turns out that Killingsworth was right to challenge the initial findings:

“[T]he flattening pattern exists but is restricted to the least happy 20% of the population, and that complementary nonlinearities contribute to the overall linear-log relationship between happiness and income. We trace the discrepant results to the authors’ reliance on standard practices and assumptions of data analysis that should be questioned more often, although they are standard in social science.”

In plain English, Kahneman and Deaton messed up their econometrics in the original study (“mislabeling of the dependent variable and the incorrect assumption of homogeneity”), and Killingsworth was right: money does buy happiness, ad infinitum. That is unless you’re already one of the 20% least happy people in society, who often suffer from various other ailments such as “heartbreak, bereavement, and clinical depression”. For people in those situations, money does very little to make them happier.

But for everyone else, it does appear that money makes you happier, regardless of how much of it you earn. Even better, if you’re already an especially happy person (top 30% for your income bracket), then the more you earn over $100,000 will increase your happiness “at an accelerated rate”.

Ok, money makes people happier. We get it. So what?

I’m glad you asked – there are clear policy implications that flow from these findings. For example, economist-cum-politician Andrew Leigh recently claimed that the redistribution of income is justified on the grounds that:

“[A]nother dollar buys less happiness for a billionaire than for somebody who’s sleeping rough. If you believe that, then it follows that redistribution can raise overall happiness.”

Now that might be true: the Kahneman/Killingsworth/Mellers study used a log (percentage) scale, so for a high income earner to get the same subjective happiness that they got going from $1,000 to $10,000 would require another jump to $100,000, then to $1,000,000, and so on.

But notice the word I italicised: subjective. These estimates are for the same person, not two separate people. It could well be that the person “sleeping rough” has clinical depression and another dollar won’t make them much happier at all. In that case, another dollar for a billionaire like Scrooge McDuck might increase society’s overall happiness by a lot more; we really can’t say one way or the other.

Money makes Scrooge McDuck very, very happy.

These new findings should – but let’s be real, won’t – give pause to politicians calling for tax hikes on people who earn income above a certain threshold in the name of overall happiness or wellbeing. High marginal tax rates are damaging in many ways; for instance, they discourage work and skill acquisition, and they create incentives for wasteful tax minimisation (an army of tax accountants who could be doing something more productive) or even tax evasion (black market ‘cashies’).

Raising taxes also creates what economists call deadweight losses, which are essentially the private exchanges that can no longer be made because of the new taxes. While the happiness gains from tax and redistribution policies may never eventuate, the deadweight losses are very real, ultimately destroying value creation and making us all poorer.

The implications are clear: making claims about the relationship between income and happiness should not be the sole factor in designing policy, and structuring budgets around ‘wellbeing’ risks losing objectivity and flying blind. Everyone wants to improve society’s overall happiness, but you can’t base policy on the erroneous claim that money matters less to high income earners without also acknowledging the complex trade-offs involved.