Money Can't Buy Love -- or Happiness

 | Dec 24, 2012 | 11:30 AM EST
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Not everything that can be counted counts, and not everything that counts can be counted. --Albert Einstein

On the eve of a cherished holiday, let's take the time to consider life beyond our daily pursuits. Real Money subscribers are by definition an ambitious lot. We are in the markets every day, researching companies, analyzing charts and synthesizing macro-economic trends, looking for that edge that will boost our returns and make money. Real Money subscribers are not greedy, however. I know this from the emails I get, elaborating on how subscribers want to use their money. Whether it be to put children through college, or to enable philanthropic giving, or simply to help fund that new start-up business that may ultimately hire an unemployed neighbor, our readers are generous to a fault, and understand that money is a means to an end, not an end in itself.

Today, rather than analyze ways to increase the means (money), let's look at ways to increase the ends. Happiness is probably the single-most cited life objective of human beings, so seems as good a place as any to start. Not only do we all want to be happy, its pursuit is enshrined in the Declaration of Independence as a founding rationale for our nation.

Money can't buy you happiness, but it does bring you a more pleasant form of misery. --Spike Milligan

But before we look at happiness, we must acknowledge that the cliché "money can't buy happiness" is only a half-truth. Clearly, people in abject poverty who do not know from where tomorrow's meal will come need money at a most basic level, and more of it will improve all aspects of life. In fact, research from Princeton University demonstrated that happiness does increase with more income, up to about $75,000 annually in the U.S. Income above that level had no effect on personal happiness.

In the U.S., per-capita income has increased steadily since the World War II, yet measures of happiness seem to be stuck at a plateau, with only around 30% considering themselves "very happy", according to a tracking study by Professor David Myers at Hope College.

More recent research from the Gallup Organization shows that through booms, busts, tranquility and terrorist attacks, personal satisfaction has stayed surprisingly constant. Around 75% to 85% are satisfied with how their lives are going, despite the good or the bad happening in the world at that time.

The stubbornness of happiness relative to income is confirmed by research on sudden windfalls as well. Arthur Brooks summarized the findings of a 1978 study of lottery winners and accident victims in a recent Wall Street Journal article: "A famous 1978 study ... in the Journal of Personality and Social Psychology showed that while the winners experienced an immediate happiness boost right after winning, it didn't last. Within a few months, their happiness levels receded to where they had been before winning. As time passed, they found they were actually less happy than they had been before winning." Similarly, Harvard psychologist Daniel Gilbert surveyed lottery winners and amputees and reported identical results. A few months after the event -- the win or the accident -- happiness returned to roughly the same level as earlier. Like many investments, happiness seems to have a strong quality of reversion to the mean.

In fact, the only research showing a strong correlation of income (or wealth) to happiness are those studies looking at relative wealth. To the extent that money can bring happiness, it is most relevant when we have more than our peers, thus enhancing our social rank. Recent work at the University of Warwick and Cardiff University in the U.K. confirmed this. The researchers found that "...simply being highly paid wasn't enough -- to be happy, people must perceive themselves as being more highly paid than their friends and work colleagues."

Adam Smith vs. the Happiness of Nations

Money has never made man happy, nor will it, there is nothing in its nature to produce happiness. The more of it one has the more one wants. --Benjamin Franklin

While thought leadership on economic wealth comes from Adam Smith and his philosophical descendants, we need to look farther afield for thought leadership in the happiness of nations. In fact, we need to go halfway around the world to a small nation-state nestled in the high eastern Himalayas, the Kingdom of Bhutan. Since the early 1970s, Bhutan has formalized the measurement of the happiness of its people -- rather than simple economic output -- as the primary goal guiding its policy decisions. The King of Bhutan, Jigme Singye Wangchuck, said, "... Most socio-economic indicators are an attempt at measuring means; they do not measure ends ... I wish to propose happiness as a policy concern and a policy objective."

Happiness resides not in possessions, and not in gold, happiness dwells in the soul. --Democritus

The Bhutanese are insightful because it turns out that the happiness of a nation's people is not highly correlated to its income level. This daily chart from The Economist reveals the concept. According to the accompanying article, "Despite the economic gloom, the world is happier than it was before the financial crisis set in ... 77% of respondents describe themselves as 'happy,' three percentage points higher than in 2007. Those countries who report themselves as being the happiest tend to be in poor and middle-income countries, while the gloomiest are in rich countries."

Brookings Institute researchers Carol Graham and Stefano Pettinato charted measures of life satisfaction against per-capita income, and similarly found little correlation -- with one exception. As you might expect after learning of the $75,000 rule, the high per-capita income countries all generally have high life satisfaction scores. In the low per-capita income countries, however, there is no correlation between income and happiness. In fact, some of the poorest countries at the time of the study, such as Nigeria, China, India and Bangladesh, had satisfaction scores as high as many developed countries!

The map below presents the same concept geographically. It is a graphic representation of the Satisfaction with Life Index created by a researcher at the University of Leicester in the U.K. Not surprisingly, some wealthy nations have high ratings while some poor areas have low ratings. The surprise is the vast swathes of green -- countries in which people are "OK" with life do not necessarily track to wealth.

The paradox of national income not necessarily translating into national happiness should not be surprising considering what we just learned about individual happiness, yet it has spawned a whole category of research spanning the fields of economics to sociology. Richard Easterlin kicked off the debate with a 1974 paper that first elucidated this disconnect between GDP and GNH (gross national happiness). Within this field of study, the concept is actually called the Easterlin Paradox.

Success is not the key to happiness. Happiness is the key to success. If you love what you are doing, you will be successful. --Albert Schweitzer

Many are looking for alternative explanations for the spreads between happiness and income. One factor with some credibility is the type of work a country mostly performs. Researcher Charlotta Mellander working at the University of Toronto's Martin Prosperity Institute found that countries with more people working in the "creative class" were generally happier than those with more people in the "working class." This makes sense, as the level of satisfaction from work involving non-routine creativity would seem to be intuitively more appealing than rote work in unappealing conditions, such as sweatshops.

Clearly, the controversy of happiness vs. GDP resonates, because this field of study is booming. Many organizations are attempting to measure gross national happiness, with an eye toward finding non-economic ways to increase it. (With our understanding of the mean-reverting nature of happiness, this may be a fruitless effort, but why not at least try it?)

The concept is now taken seriously enough that even the Organization for Economic Co-operation and Development (OECD) is weighing in with its Better Life Index, which is designed to measure well-being using a combination of 11 factors. As they describe it, "The OECD has been keenly involved in the debate on measuring well-being. Based on this experience, these 11 topics reflect what the OECD has identified as essential to well-being in terms of material living conditions (housing, income, jobs) and quality of life (community, education, environment, governance, health, life satisfaction, safety and work-life balance)." You can see how your country stacks up against other countries here.

Other organizations in the pursuit of happiness include the World Values Survey, which is "a worldwide investigation of sociocultural and political change ... conducted by a network of social scientists from leading universities all around world ... who have surveyed the basic values and beliefs of the publics of almost hundred societies, on all six inhabited continents." Gross National Happiness USA is a more recent entrant attempting to raise awareness of the GNH concept in the West. Evaluate your own happiness with their test here.

Even the renowned consultants McKinsey have something to say. Happily, their research arm, the McKinsey Global Institute, reports that in the U.S., the "love surplus" continues to rise. Of course, the veracity of this statistic is open to question; the best way to verify it may be at home today with your loved ones.

It is not how much we have, but how much we enjoy, that makes happiness. --Charles Spurgeon

Success is getting what you want. Happiness is wanting what you get. --Dale Carnegie

It's not having what you want, it's wanting what you've got. --Sheryl Crow, "Soak Up the Sun"

Markets: Survive. Life: Thrive.

As we close the book on 2012, we all have plenty to contemplate this holiday season. Most subscribers likely made good money this year, with the equity markets surging 15%, gold up again, and other asset classes performing well. Most of us get intense satisfaction participating in the daily battle that is "the markets" and are proud of our success no matter what our actual returns are. But whether that success and compensation translates into happiness -- or any other non-monetary objective -- is a question only you can answer individually.

Not surprisingly, there are plenty of "systems" to help you evaluate and improve your happiness. For example, Dr. Martin Seligman, Director of the Positive Psychology of Center at the University of Pennsylvania, will shepherd you to the achievement of "Authentic Happiness." Another popular site is Dan Buettner's Blue Zones. Among other subjects, his six "Thrive Centers" are designed to show you how to be happy. He offers advice on optimizing your experience in community, workplace, social life, financial life, home and self. Take his test here.

As a long-time Real Money contributor, I happily offer investment advice. But when it comes to happiness, you are on your own. The only advice I can offer is to utilize the quiet that always accompanies this time of year to step back and consider what you do and why you do it, and what is really important in your life. The markets will intrude again soon enough.

I wish you all a prosperous -- and happy -- 2013!

When I was in grade school, they told me to write down what I wanted to be when I grew up. I wrote down happy. They told me I didn't understand the assignment. I told them they didn't understand life. --John Lennon

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