Thursday, February 18, 2010

Average Income and Happiness

Yesterday I noted Daniel Kahneman's contention that Americans report their happiness rises with their income up to a point, but after that point, there is no correlation with happiness. The point he named was $60,000 in household income per year. I noted that this is about the midpoint of the income distribution in the U.S.A. now.

An anonymous respondent pointed out that more money has meant more contentment for her family, and where you live makes a big difference in whether $60,000 buys basic contentment or not. She offered that in her California neighborhood, $60,000 would not go very far. She reports that now that they make $200,000 they are more content than they were when they made half that.

This criticism is just. To apply Kahneman's insight about the nation as a whole to any particular place we would need to adjust the number to local conditions. The median household income in California as a whole is about $60,000. However, of the 100 communities with the highest median household income in the United States, 19 are in California (far higher than California's proportion of the national population). The top of the list: Atherton, CA, with a median household income just over $200,000.

To turn Kahneman's finding into a general proposition, I propose this hypothesis: happiness correlates with income up to the median household income of your community.


Debra Boyd said...

As humans, we can't seem to stop ourselves from comparing our situations to others. So, of course you are correct that it is relationship to the local community, not because of the purchasing power of the money, but because those are the people that we are comparing ourselves to. What this entire conversation does not address is the power of seeking happiness in the one place it truly exists in the still silence of our existence which provides us the opportunity to see the universe in ourselves & others. The answer isn't outside, but inside.

Gruntled said...

Kahneman's larger point is that our social relations make us happy, not our money. Is that part of the "inside" you had in mind?

randy said...

gruntled, your analysis is disturbingly simplistic; this is what you, a working sociologist can come up with? wow.

first, INCOME is just part of one's financiial picture. overall net worth is trememdously important. income alone means very little, potentially. of more importance are debt and expenses. who cares if you make $100k but spend every penny of it and are STILL in the red 20k to the credit card banks?

no, it's the whole wealth picture that's important. ALSO one's own personal wants and needs are very much to the point in any discussion of wealth and happiness.

i would say this; up to a certain point, wealth IS a signifigant factor in, if not happiness exactly, than contentment, satisfaction, well-being. but beyond a certain point(which will vary from person to person)more wealth does NOT translate into more 'happiness''s just More Money.

if you're broke and suddenly get 50k, you'll be ecstatic. if you've already got 500k and your investments earn you another 50k one month, you'll just say 'hey, all right.' when you get the statement.

Gruntled said...

"i would say this; up to a certain point, wealth IS a signifigant factor in, if not happiness exactly, than contentment, satisfaction, well-being. but beyond a certain point(which will vary from person to person)more wealth does NOT translate into more 'happiness''s just More Money."

Right. And Kahneman's point is that on average, for the whole population, that certain point is about $60,000.

Of course wealth matters. Still, even without knowing wealth or debt, we can see in the survey research a positive correlation between income and happiness up to a point, at which point the correlation breaks down.

Anonymous said...

As you are feeling around for a working hypothesis, let me suggest that happiness/satisfaction levels may continue to rise with income level significantly beyond the median income in many communities. In the rural, northwestern PA community in which I live the median income for families is just over $40,000, and the median household income is well below that. Even with our low cost of living—my suspicion is that satisfaction would continue to increase toward something like the $60k level or maybe a bit less. Living amongst economic disadvantage doesn’t completely blind folks to their own financial struggles (though it certainly has some effect on expectations.)

Michael Kruse said...

Check out Why Aren’t Americans Happier?—Posner

"Happiness moreover is a psychological, which is to say a biological, state, and biological states are not as variable as income is. There are people in the world today who earn $1 a day, and people who earn $1 million a day, but it would be inconceivable than the latter was one million times happier than the former, just as no person in any society can run a million times faster than the slowest runner. The human biology may simply be such that the elasticity of happiness to income is very low."

From a review I wrote about Charles Karelis' "The Persistence of Poverty":

"... Instead, because researchers come from a position of affluence, they have failed to notice that there are two types of utility and one type actually leads to increasing marginal utility.

Karelis calls the two types of utility “pleasers” and “relievers.” Oreos would be an example of pleasers and so would dollars for most economically stable people. Each additional unit brings pleasure but at a diminishing rate. Relievers work differently. Karelis asks us to imagine being on a picnic when suddenly we are stung by a bee, on the hand lets say. Our mind is now directed toward the pain in our hand to the exclusion of whatever other physical discomfort we may be experiencing. Karelis has one dab of salve at hand and he applies it to our bee sting. Our pain is relieved. The salve has a high degree of utility for us.

Now instead of one sting on the hand, we are stung on the hand and on the neck. There is still only one dab of salve. Its application to one sting will decrease the pain some but will still be left in considerable distracted discomfort. A second dab of salve would have more marginal utility than the first did.

But now let’s say we have six bee stings at various locations on our body and still only on dab of salve. The one dab of salve provides minimal relief for us. But each successive dab supplies an increasing quantity of relief.

So what if you woke up every day with six bee stings and you had been supplied with six dabs of salve to cover your next six days. Would you allocate them one a day across the next six days or would you use them all in one day to have at least one day out of the six pain-free? The chronic poor routinely choose the one blissful day. ...

... Therefore, the poor are rationally inclined to spend a small pile of money in one big bang. Buying an expensive set of clothes gets you esteem for at least a moment. Entertainment, gambling, or substance abuse provides at least temporary distraction and relief. Experience tells you that there is an inadequate supply of relievers around so when you have the fortune to get an amount that gives you complete temporary relief, do it!

Now what Karelis points out, using the bee example again, is that dollars can function as relievers for the person in poverty. Those dollars will have increasing marginal utility but only up to the point of achieving significant relief. Once we cross that line, the money becomes a pleaser utility and diminishing marginal utility kicks in. ..."

My guess is that greater income that serves as relievers brings happiness. Income that adds pleaser utility just beyond the threshold of no longer needing relievers brings happiness, but their is diminishing utility. I suspect that once someone is financially secure enough to lead a lifestyle approximating others in their reference group that additional dollars have less impact on happiness.