Happiness & Public Policy

I’ve got a new piece at The American on how money saves us from unhappiness in old age. A slice:

Easterlin, a pioneer of the study of happiness in the field of economics, set out to chart the trajectory of happiness over an ordinary person’s life-span. He discovered that, on average, happiness rises slowly from our early twenties, peaks at about forty-five, and then declines as slowly as it rose. But the smooth arc of happiness over the life-cycle obscures dramatic action in average satisfaction within the main domains of life—family, work, health, and finances—that together compose the overall trend.

Easterlin, drawing on the massive General Social Survey, reports that health satisfaction heads steadily south from eighteen on, while family satisfaction peaks at about fifty then tails off determinedly. Job satisfaction hits a crescendo at about sixty and slopes off with retirement. Only financial satisfaction, like Matlock reruns, gets better with old age. Financial satisfaction, Easterlin finds, dips until the mid-thirties, levels off, then heads skyward, soaring ever higher each remaining year of life. If not for sharply rising financial satisfaction, the mild downward slide from midlife would be a sharp drop into a well of gray-haired despair. Money does make us happy in at least this one way: as a firewall against an otherwise soul-sapping senescence.

But Easterlin—a vocal critic of the money-happiness link—does not interpret his findings quite this way. Why not?

Why not find out?

This is silly: 

Contrary to the common notion that paying taxes can be a painful experience, researchers at the University of Oregon say the practice actually may trigger feelings of satisfaction and happiness.

“Paying taxes can make citizens happy,” Ulrich Mayr, a professor of psychology, said in a release accompanying the study in the Friday issue of Science.

How was this determined?

Using magnetic resonance imaging (MRI) technology, the researchers observed the brain activity of 19 women who were given a balance of $100 each. The researchers created the effect of taxation by making mandatory withdrawals from their account. The withdrawn money was actually sent to a food bank’s account.

Participants also made additional choices about whether to give away more money or keep it for themselves.

The study found that two reward-related areas of the brain — the caudate nucleus and the nucleus accumbens — lit up during the taxation test. These areas are typically activated when a person experiences feelings of satisfaction, as they do after having eaten a meal.

“The fact that mandatory transfers to a charity elicit activity in reward-related areas suggests that even mandatory taxation can produce satisfaction for taxpayers,” the study said.

When the participants voluntarily gave the charity more money, the activation area was larger — a finding that, according to the researchers, sheds light on why people make donations.

Complaints…

(1) The $100 wasn’t theirs to start with—was not the fruit of the their labor, etc. Giving people a little money and then taking some of it away again is, well, giving people some money … but less than maybe they thought they were going to get at first. How is that like a tax?

(2) The money was sent to a food bank to feed the hungry. That’s nice! But the idea that this simulates what taxes generally fund strains credulity. Why not tell people instead that the money is going to buy bombs that will incidentally kill civilians in humanitarian wars? Or that it is going to a subsidy for a farmer with an income four times the subject’s? That would be rather more realistic.

(3) Even if our taxes flow exclusively to food banks and adopt-a-puppy programs and we do get some lift out of this, is it greater than the lift we would have gotten from the money otherwise? They show that giving money away voluntarily does even more for folks. So how does giving money away measure up to eating a piece of chocolate cake, basking on a beach on the Italian coast, opening the box with your new iPhone in it? Until we know, we know nothing much.

Robin Hanson on bunk neuroscience narratives, here.

I’ve only just begun, but I think I’m ready to recommend The Happiness Myth: Why What We Think Is Right Is Wrong by Jennifer Michael Hecht.

Hecht has a fine pluralistic sensibility and a knack for getting distance from otherwise invisible cultural assumptions by relating them to historical precedent. She’s already convinced me that contemporary body obsessions aren’t superior to corseting. Of course, I liked this bit:

It is a modern myth that money cannot make you happy. We all say that it can’t, but, given one wish, a lot of us would go for cash. We certainly opt for money over many other pleasures in structuring our real lives. Part of the reason is that what you can buy with money today you used to be able to get for free—social contact and play that can fit neatly into your life. Shopping, television, shows, and sports are not deep, but neither were the common social contact and play that kept people happy in the past.

Good stuff.

Here’s a test at George Loewenstein’s CMU lab. Via John Tierney.

The future of the “Does money make you happy?” debate lies in individual-level longitudinal studies of the relationship between different consumption patterns, life satisfaction, and various dimensions of positive affect. This is a nice start in thinking about the effects of different patterns of consumption.

The McKibben nonsense below has moved me to share a very short excerpt from my forthcoming Cato paper:

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The best studies are those that track people over time and see what happens to their happiness as their circumstances change. One such study used the reunification of East and West Germany—and rapidly rising incomes in the East—as a kind of natural experiment to test whether increasing incomes do make us happier. In a paper entitled “Money Does Matter!” the authors write:

average life satisfaction in East Germany increased by around 20% between 1991 and 2001, leading to a clear convergence with West Germany. Importantly, increased real household incomes in East Germany accounted for around 35–40% of this increase, which corresponds to the economists’ view that money surely matters.

On the flip-side, sudden reductions in income correlate strongly with declining subjective well-being. Hagerty and Veenhoven note that “in Russia average happiness decreased by two points following the Rubel crisis in the mid 1990s, which severely disorganized the economy. As the Russian economy began to pick up, so happiness also began to rise.”

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Note that these are quite recent papers using state-of-the-art research methods. McKibben doesn’t even deign to actually cite a single study or social scientist by name.

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Citations

Paul Frijters, John P. Haisken-DeNew and Michael A. Shields, “Money Does Matter! Evidence from Increasing Real Incomes and Life Satisfaction in East Germany Following Reunification,” American Economic Review 94, no. 3 (June 2004).

Ruut Veenhoven and Michael Hagerty, “Rising Happiness in Nations 1946–2004: A Reply to Easterlin,” Social Indicators Research 79 (2006).

The famous 1978 paper by Brickman, Coates & Janoff-Bulmann on paraplegics and lottery winners created a sort of conventional wisdom around a very strong view of adaptation or reversion back to an ex ante hedonic “set-point” after an big external positive or negative hedonic shock. The new conventional wisdom is that some but generally not all big hedonic gains and losses dissipate due to adaptation. Here’s a good summary of recent work from Diener and Oishi:

In 1978 Brickman, Coates, and Janoff-Bulman presented evidence from paraplegics and lottery winners to offer empirical support for the idea that adaptation brings us all back down to hedonic neutrality, irrespective of how good or bad the event was originally experienced. It should be noted, however, that in a closer inspection, the evidence of Brickman et al. for adaptation was mixed (i.e., paraplegics were not as happy as others). Our recent studies offer stronger support for adaptation, as well as the modifications that must be made to the original theory. First, it appears that people adapt over time, but not always completely back to the point where they started. For instance, we found that both widowhood (Lucas, Clark, Georgellis, & Diener, 2003) and unemployment (Lucas, Clark, Georgellis, & Diener, 2004) led to lower levels of life satisfaction even many years after the event. Although people showed adaptation over time after the event occurred, they had not adapted completely back to their former levels of life satisfaction even after five years. Despite the fact that people may not adapt to all conditions, we have found that they adapt to the smaller rewards and setbacks of everyday life (Suh, Diener, & Fujita, 1996).

A couple recent papers by Andrew Oswald and friends speaks directly to the old conventional wisdom. In this paper, Oswald and Nattavudh Powdthavee “provide longitudinal evidence that individuals who become disabled go on to exhibit recovery in mental wellbeing. Adaptation to severe disability, however, is shown to be incomplete.” And in this paper, on medium-sized lottery winners, Oswald and Jonathan Gardner

offer new evidence by using longitudinal data on a random sample of Britons who receive medium-sized lottery wins of between £1000 and £120,000 (that is, up to approximately U.S. $200,000). When compared to two control groups — one with no wins and the other with small wins — these individuals go on eventually to exhibit significantly better psychological health. Two years after a lottery win, the average measured improvement in mental wellbeing is 1.4 GHQ points.

The GHQ is a measure of general psychological well-being that ranges from 0 (best) to 36 (worst). Healthy individuals score from 10-13. To put the result from the lottery study in perspective, about the worst possible thing that can happen to you in terms of psychological well-being is the death of a spouse. The average loss in GHQ points from such a devastating loss is 5 GHQ points. So, the size of the positive effect of winning a medium-sized lottery is about 1/3 of the negative effect of losing a spouse. I’d call that significant.

They conclude:

The paper’s main result — that a windfall is followed eventually by a significant improvement in mental health — contrasts with standard interpretations of the work of Brickman et al (1978). An advantage of the present study is that we follow the same individuals through time and do not have to rely on cross-section comparisons.

Better research methods are consistently showing that adaptation is not complete, and that persisting gains in a number of kinds of psychological well-being flow from gains in material well-being.

There’s an interesting, but rather strangely house-size obsessed article (the author has written a book on building your own house) on happiness in last week’s Washington Post to which Robin (and my Cato boss, David Boaz) alerted me. The author interviews economist Luis Rayo, who has written a fascinating theoretical paper [pdf] with Gary Becker formally modeling, among other things, the way an idealized process of natural selection would fit organisms with a strong desire for good feelings while also ensuring that the good feelings don’t last very long. In an analogical nutshell: satiation just can’t last long; we’ve got to get hungry all over again to be motivated to get off the couch and look for the next meal. The way I interpret the paper, they nicely show that the process of psychological “adaptation” or “habituation” — the alleged basis of the so-called “hedonic treadmill” — is more a precondition for running at all (like friction) than a way of running in place. Anyway, in the Post article, Rayo points out that not all satisfactions are subject to adaptation.    

More important, [Rayo] went on to say, the psychology literature and surveys clearly show that not all happiness is ephemeral and geared to endlessly moving targets. With nonmaterial things, the target does not move.

“Exercise will absolutely make you feel better. Your social network, family and friends can bring permanent happiness. Longtime relationships can bring long-term satisfaction.”

The claim here is… what? Satisfaction from money is hit hard by adaptation, but satisfaction from health and social embeddedness isn’t?

It’s truly hard to know what to make of the claim. Because I’m certain Rayo knows what he’s talking about, I’m sure he didn’t say “nonmaterial things” are not subject to adaptation. I assume the author intends something like “non-pecuniary,” since exercise is a material thing, as are our friends and family members (to be pedantic about it). And, of course, money can buy both gym memberships and the leisure to nurture our emotionally sustaining relationships. “Material things” and “things money can buy” are not well-defined categories about which one can make useful psychological generalizations.

Suppose tomorrow a Swiss bank account was opened in my name and one billion dollars was deposited in it — but I didn’t know it. It would be pretty surprising if this had any effect on my feelings or my satisfaction with life. Having money and knowing it does affect “happiness” (as construed by survey research) by providing a sense of security and control; we gain something simply in knowing we could convert our cash to consumption. But money affects happiness mostly through actual consumption. No doubt some patterns of consumption are more subject to adaptation than others. Sadly, happiness research has fixated almost entirely on income levels, and almost not at all on consumption levels, much less on differently composed patterns of consumption at different levels. It is safe to say that we know almost nothing about this.

A number of happiness researchers are souring on the strong adaptation thesis popularized by Brickman and Coates’ famous paper on lottery winners and amputees. Richard Easterlin claims to show that the fairly stable level of average self-reported happiness over the life cycle (rises slowly and slightly from about 18 to 45 and then declines slowly and slightly) is a function of offsetting changes in life-domain satisfaction, and not so much adaptation. So, for example, average satisfaction with health declines sharply from middle age. But satisfaction with finances rises sharply. Strangely, Easterlin takes declining health satisfaction as evidence that we do not adapt fully to changes in health, but he does not take sharply rising financial satisfaction as evidence that we do not adapt fully to gains in financial resources. Here is what he says about the latter:

While people’s incomes typically rise during their prime working years, and then level off and decline, satisfaction with their financial situation is, on average, fairly constant until almost age 40, after which it begins to rise, with the largest increase in late life. What must be happening is that conceptions of material needs are being readjusted as actual life circumstances change. Relative to income these needs are lowest in late life, and financial satisfaction correspondingly greatest.

It strikes me that there is an obvious hypothesis Easterlin neglects. Financial satisfaction shoots up right about the time in the life-cycle when income plummets — retirement from the work force. You can see the perversity here in looking primarily at income as a proxy for material well-being. On average old people have relatively small incomes, because they are retired, and relatively huge stores of wealth, because of compound interest. And wealth increases non-linearly due to compound interest, with the biggest gains coming later in life. Forty-something is about when expenses on children fall sharply and the compounding effects of interest starts to get good. And retirement provides the leisure time to enjoy the consumption of accumulated wealth. I conjecture that experience helps us figure out what we really like, and so old people are more likely to consume in patterns that are truly enjoyable.

Click here for an image of the charts from Easterlin’s paper. Financial satisfaction is the only thing keeping us from being miserable in old age! The lasting satisfactions from friends and family all plummet! Now, it seems to me pretty arbitrary to interpret the permanent negative effect of declining health satisfaction as disconfirming the adaptation-setpoint hypothesis but to interpret the permanent positive effect of increasing financial satisfaction in terms of some kind of complicated story about shifting conceptions of material needs. Both explanations should have the same form: Declining health makes us less happy, and we don’t get used to it. Increasing wealth, and the increased leisure and consumption it enables, make us more happy, and we don’t get used to it either.

[Cross-posted from Overcoming Bias.]

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.