Money Matters. Really.
I think Easterlin’s work on happiness across the life cycle is most revealing about the composition of life satisfaction over time. Indeed, I think it rather blows away the money won’t make you happy thesis. What Easterlin has done is construct a “synthethic panel” (stitching together several separate panels) to provide a picture of the course of satisfaction in several domains over the course of a life. What he is trying to explain here is how the ups and downs of domain satisfaction combine to produce a stable lifetime happiness trend.
The virtual congruence of predicted with actual happiness implies that the slight rise in happiness through midlife that occurs in the population as a whole is due, on average, chiefly to growing satisfaction with family life and work, which in combination more than offset diminishing satisfaction with health. As individuals marry and form families and progress in their careers, the enhanced happiness they obtain from these sources offsets the adverse impact on happiness of a gradual deterioration in health. Beyond midlife, however, happiness decreases slowly, because the continuing decline in satisfaction with health is joined by diminishing satisfaction with family situation and work. These negative influences on happiness are considerably offset, however, by an upswing in people’s satisfaction with their financial situation. This upswing, which is most marked at the oldest ages clearly cannot be due to an upsurge in income at older age, but must reflect a decrease in emotional strain as financial pressures and material needs diminish in the later stages of the life cycle.
Basically, after middle age, everything gets worse other than financial satisfaction, which continues to rise. And it rises at a rate sufficient to more or less offset decreasing satisfaction in all the other domains. Now, I think Easterlin sort of misses the most plausible hypothesis about the cause of climbing financial satisfaction. Easterlin’s view is that basically that at retirement our financial expectations relax, and so the reality expectations gap closes. There’s probably a lot to that. Of course the effect can’t come from increasing income once you’ve stopped having an income, or have reduced your income to pensions/annuities/old age assistance.
It seems to me that the obvious hypothesis is: retirement is focused on consumption and consumption is satisfying.
I know my financial satisfaction isn’t really rising much precisely because I’m at the stage in life where a large portion of any increase in income get ploughed directly into savings for retirement. Right now, I worry about saving enough for retirement. When I retire, long after I’ve paid off my student loans, my mortgage, etc., and I have saved enough, then I won’t worry about whether I saved enough. Most crucially, I get to start consuming the fruits of a lifetime of labor.
A lot of pre-retirement consumption is instrumental consumption. I have to buy clothes that I might not otherwise buy because of my job. I invest in my (hypothetical) children’s education. I might worry about the kind of car I have because the signal my car sends affects my perceived status, which affects my likelihood of promotion, which affects my income, which affects my consumption level in retirement. But when I’m retired, I just consume what I like because I like it. (Well, for the most part: Irv next door just bought a sweet set of Pings and I want to look good in the clubhouse, too. But, still, even my status competition has shifted to the leisure domain. I enjoy golfing more than overpriced french cuffed shirts.) As you get closer and closer to the end of life, and it is becomes more and more certain that the money isn’t going to run out, consumption becomes ever more worry-free, and so more enjoyable.
Obviously, income and wealth aren’t the same thing. Old people are the wealthiest, even though they don’t have the biggest incomes. The non-instrumental enjoyment of wealth is a great pleasure, and that’s what keeps life from being miserable in old age.
So, given Easterlin’s finding that financial satisfaction is what staves off unhappiness in old age, and the evergreen finding that at any given time and place people with higher incomes are happier, what argument is there, relevant to individual lives, that money has no important relation to well-being. I don’t want to know whether I am happier than someone at the same point in the income distribution 50 years ago. That’s irrelevant. I don’t want to know whether I am happier than a Serb at the same point in the Serbian distribution. That’s irrelevant. What I want to know is whether I will be happier if my income increases 20%. The answer is, yes, I probably will be happier. I want to know if my life will go better overall if I am wealthy in my golden years. The answer is, again, yes, probably.
If I have to read another article that shows me the flat 50 year happiness trend against the rising real income trend, and then implies that it wouldn’t matter to me if my income doubled, I swear I will strangle a kitten. What wouldn’t matter to me is if my income only ever increased at the rate of real income growth. But that just doesn’t happen for most of us. We shoot up through a bunch of income deciles over our working years. If improving relative position makes us happier, then most of us grow happier over our working lives due to rising incomes. As when we drop income deciles upon exiting the labor market, we coast on our accumulated wealth. That’s the story. Money matters.
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Hmm…
You say, “The obvious hypothesis is: retirement is focused on consumption and consumption is satisfying.”
That’s not obvious to me. Haven’t any studies been done on why older people have the highest median of subjective well-being (SWB)? Do these studies say consumption is the necessary and sufficient determinant of high self-reports of happiness? I don’t think so.
I believe Prof. George Valliant has run longitudinal studies and his conclusion is that there are many variables.
Other researchers studied nuns and came to the same conclusion. The income and retirement savings of nuns are essentially “controlled for” because they’re provided for by the church equitably. The study found that the best predictor of the health and longevity of nuns was how optimistic they were at a young age [at least, that’s my reading of the study].
May I make a broader critique of your recent two posts? I interpret happiness studies differently than you. Here’s how:
Imagine two people. Each person finds that their job gives them a few moments of “flow” each day (when time “flies by,” in a good way), and a sense of “control” and they have a few close people in their lives. But say that the first person, Harry, sees a rapid rate of increase in income decade by decade, while the second person, Louise, doesn’t. How much does the income factor push Harry’s and Louise’s happiness to the topmost bounds of each person’s genetically-determined possible range for happiness? Perhaps the lifetime increase in income earnings pushs Henry’s set point 8% higher than otherwise, while Louise’s happiness rating doesn’t budge.
In other words, the happiness research is saying that there’s a measurable effect from income and savings, but that the effect is *far smaller* than genetics and other factors (such as having “flow”, “control” and “close friends”). I believe several studies suggest than money has less than 8% of an effect on your happiness, while heredity was, say, 50%. Don’t quote me on the numbers, but the contrast was roughly that stark.
In an earlier post, you distinguished between classical economic utility and happiness. I think that’s appropriate here as well. People still derive utility from money, and the premises of classical economics about human motivation still hold. But don’t confuse utility with high SWB!
People who focus their attention, worries and dreams on boosting their rate of income gains seem, in general, to say they are less happy than people who de-emphasize that concern in favor of other goals.
I stand by the above statement, even if you change it to read “people who focus their attention, worries, and dreams on boosting their rate of annual income increase so that they’re doing relatively better than their peers will be less happy than people who de-emphasize that concern in favor of focusing on other goals.”
Also, Will, I bet you’re saving much more diligently for retirement than the average American, who seems not to be saving at all. So you can’t extrapolate from your experience to say that all people in your age cohort are bound to be less happy (because they’re busy stuffing their 401(ks) and 403(b)s) than retirees who are spending their union-earned traditional pension plan money on bonbons. That’s completely unsubstantiated.
So, Will, it sounds like you’re admitting that you’re not as happy as you genetically could be right now. Is that right? If so, do you really think it’s because you’re saving for retirement instead of consuming? Or is it more likely because you haven’t paid enough attention to whatever other factors might boost your happiness *right now*? And I bet that changing how you think about the world using cognitive therapy techniques will make more of a difference than any external thing you might change (more money, doing more “good turns” for people, listening to music, voting Republican). Possible exception: getting married, which seems to have a very important influence on people’s happiness. (It appears you’re not married.)
Hey, I wouldn’t have turned this personal if you haven’t used yourself personally as an example several times in your excellent blog. Please excuse this over-long post, and take it in the friendly spirit it’s offered.
Sean, Great thoughts. I agree with most of what you’re saying.
Actually, I think the Lykken finding is that almost 80% of the variation in happiness is genetic. Part of the point of the Easterlin paper cited is to challenge the strong set-point theory. He argues that we wouldn’t see so much variation in domain satisfaction if the set-point theory was true. I’m not sure about that. But he does do a good job of making the point that the stability of happiness over the lifecycle isn’t due just to some stable disposition to be that happy, but has to do with offsetting trends in domain satisfaction.
Easterlin’s work also indicates that old people do not have the highest SWB. So there is a conflict in the literature.
Is it Seligman? who gave us the happiness equation, where Happiness = Set-point + Circumstances + Voluntary activity. I agree that V can have only a small positive effect happiness (though it can have a tremendous negative effect.)
My point about consumption in retirement is a conjecture, but, as far as I can tell, consistent with the data and common sense. My gut says there is a real distinction between leisure-oriented consumption and instrumentally oriented consumption, which I think is intriguing. The point would then be that consumption per se won’t do you much good, but leisure-oriented consumption will. That should be testable, though I doubt it’s been tested.
Will, Thanks for responding. Fascinating point about the difference between leisure-oriented consumption and instrumentally-oriented consumption.
You convincingly challenge the conventional wisdom when you say that the 50-year trend in average income doesn’t determine the importance of money in people’s individual lives. Keep up the insightful work.
[…] — Will Wilkinson […]
Gee, maybe older people are wiser? The most compelling implication of happiness studies, to me, is that we should spend more time becoming aware of how good we’ve got it.
My intuition would be that older people have a better grasp on life a how to live it, and thus are less unsettled in general by all the small stuff. “And it’s all small stuff”. Likewise, my intuition is that people are as happy as their world views lead them to be, regardless of their circumstances. “You’re as happy as you want to be”….
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