Does Money Buy Happiness?

A tutorial to explore the question

Photo by John McArthur on Unsplash

Before starting to write this article, I googled “does money buy happiness?” Here is a snippet of what I found:

It turns out money may buy some happiness (CNN)

Here’s How Money Really Can Buy You Happiness (Time)

Can Money Buy Happiness? Research Says: Yes, up to a Point (Insider)

And the list goes on and on. In most cases, experts say something that can be summarized as: “Yes,…… but……..” Indeed the question is complex and the findings of existing studies are somewhat enigmatic.

In this article, I am going to share my understanding of the topic based on what I have learned in the first two years of my doctoral study.

Fundamentally, all we really want to know is: “what is the causal effect of money on happiness?” To investigate the question, we can use the same framework we apply to investigate the effect of a pill or a vaccine on health outcomes. In the social, behavioral, and health sciences, the framework to explore cause-and-effect relationships is called the “counterfactual causal framework.”

Here is a step-by-step method you can use to refine the question and attempt to find the answer:

1. Clearly define the treatment. In this case, the treatment is some amount of money. Let’s pretend you want to know the causal effect of getting an extra $1000 on your happiness.
2. Define the time period. Let’s further pretend you want to know the causal effect of getting an extra $1000 on your happiness for 30 days.
3. Imagine yourself in two different worlds. In these two worlds, everything else is exactly the same, i.e., you have the same family, the same friends, the same tinder matches, the same Instagram followers, the same furniture at home, and so forth, except in one world, you have an extra $1000, and in the other, you have an extra $0. In other words, if your baseline income is $X, you have $(X+1000) in one world, whereas, in the other world, you have just $X.
4. Find the difference in happiness between the two worlds. This is the most challenging step! Just be honest with yourself and ask: what would be the difference in my happiness in these two worlds? You do not necessarily need a scale to measure your happiness; a qualitative difference in happiness in the two worlds will suffice. For example, here is what I find when I ask myself the same question: My happiness for 30 days in a world in which I have $(X+1000) is greater than my happiness for 30 days in a world in which I have $X (keeping everything else the same)💰😊
5. The effect is equal to the difference in happiness between the two worlds. For me, the effect of getting an extra $1000 on my happiness for 30 days is positive. Colloquially, I claim money buys happiness!

Now, let’s try to understand the nuances in the investigation and why different researchers come up with different answers.

First of all, the answer depends on the following:

1) how you frame the question and

2) who is in your target population

For example, getting an extra $1000 will make me happier over a 30-day period compared to getting an extra $0 and keeping everything else constant. But an extra $1000 will not necessarily make me happier over my lifetime compared to the $0 situation. To further complicate the issue, if my baseline annual income is $20,000, then the extra $1000 will make me extremely happy over a 30-day period compared to getting no extra money; however, if my baseline annual income is $2 million, then getting the extra $1000 will not result in any noticeable difference in my happiness as compared to not getting any extra money. Usually, in quantitative social science studies, researchers target the Average Causal Effect which may not be relevant to you in case you are not close to the average person (the average person is a statistically-found-mythological-creature, albeit useful for policy evaluation purposes).

Okay, here is the critical point to remember:

The only difference between the two worlds you conceived is the $1000 extra money. Everything else stays EXACTLY THE SAME!

Many people often get this part wrong. For example, if I claim that a $1000 increase in my income will make me happier, people oppose my statement and say: “Happiness depends on many other factors. What if you get an extra $1000, but your beloved people betray you? Or your favorite football team Liverpool FC loses another Champions League final? Will you be happy?” Well, along with my income, if other things changed in my life, then it is impossible to isolate the unique effect of the change in income on my happiness (regardless of the direction and the magnitude of the true effect). In that case, I cannot conclude about money’s causal effect on happiness.

Sometimes I hear people say, “Western countries became richer over the last 70 years, but happiness did not increase similarly within the same period. And so, money doesn’t buy happiness/change in income is not a good predictor of change in happiness.” Even if their data and conclusion are correct, the method applied to reach the conclusion is wrong.

Why? Because over the last 70 years, many other things have changed in the western world: family composition, moral values, taste for food and music, economy, geography, demographic characteristics, etc. All these factors may have affected happiness. The question we have to ask is: what would have happened to the happiness of the average Westerner had everything else remained the same over the last 70 years except they became richer?

Another typical example people use to claim that money does not buy happiness is, “I know a rich family who are unhappy and a poor family who are happy.” Again, the problem with this statement is that the two families are possibly not counterfactuals of one another, i.e., beyond the difference in income, many other things are also different between them. To explore the effect of money on happiness, we need to compare two groups of people who are otherwise equal, except one group is poor while the other is rich. Apples-to-apples comparison is the essence of counterfactual causal thinking.

To conclude, for any individual human being, except for them, no one on earth can possibly know how money affects their happiness. Researchers — even in the best-case scenario — can investigate the question in a very narrow context (depending on the amount of money, timeframe, and target population). And even in that case, they can only hope to explore the effect on the average person of some target population. It may not be wise to extrapolate that specific finding to your life.

Do share your thoughts on the topic. Tell me the outcome of your thought experiments! And in case you would like to read more on how to explore cause-and-effect relationships, feel free to visit my previous posts:

How to Explore the Effect of Doing Something? (Part 1)

How to Explore the Effect of Doing Something? (Part 2)