It only costs a small amount, a slight risk, with the possibility of a substantial reward.
But will it make you happy? Will it give you long-lasting happiness?
Undoubtedly, there will be a temporary peak in happiness, but will all your troubles finally fade away?
That is what we will investigate today. We explore the economics of happiness and whether money can buy happiness. In this post, we will start by broadly exploring the topic and then look at theories and substantive research findings. We’ll even have a look at previous lottery winners.
For interested readers, we will list interesting books and podcasts for further enjoyment and share a few of our own happiness resources.
Ka-ching: Let’s get rolling!
Before you continue, we thought you might like to download our three Meaning and Valued Living Exercises for free. These creative, science-based exercises will help you learn more about your values, motivations, and goals and give you the tools to inspire a sense of meaning in the lives of your clients, students, or employees.
Happiness economics is a field of economics that recognizes happiness and wellbeing as important outcome measures, alongside measures typically used, such as employment, education, and health care.
Economics emphasizes how specific economic/financial characteristics affect our wellbeing (Easterlin, 2004).
For example, does employment result in better health and longer lifespan, among other metrics? Do people in wealthier countries have access to better education and longer life spans?
In the last few decades, there has been a shift in economics, where researchers have recognized the importance of the subjective rating of happiness as a valuable and desirable outcome that is significantly correlated with other important outcomes, such as health (Steptoe, 2019) and productivity (DiMaria et al., 2020).
Broadly, happiness is a psychological state of being, typically researched and defined using psychological methods. We often measure it using self-report measures rather than objective measures that are less vulnerable to misinterpretation and error.
Including happiness in economics has opened up an entirely new avenue of research to explore the relationship between happiness and money.
Andrew Clark (2018) illustrates the variability in the term happiness economics with the following examples:
Happiness can be a predictor variable, influencing our decisions and behaviors.
Happiness might be the desired outcome, so understanding how and why some people are happier than others is essential.
However, the connection between our behavior and happiness must be better understood. Even though “being happy” is a desired outcome, people still make decisions that prevent them from becoming happier. For example, why do we choose to work more if our work does not make us happier? Why are we unhappy even if our basic needs are met?
An example of how happiness can influence decision-making
Sometimes, we might choose not to maximize a monetary or financial gain but place importance on other, more subjective outcomes.
To illustrate: If faced with two jobs — one that pays well but will bring no joy and another that pays less but will bring much joy — some people would prefer to maximize their happiness over financial gain.
If this decision were evaluated using a utility framework where the only valued outcomes were practical, then the decision would seem irrational. However, this scenario suggests that psychological outcomes, such as the experience of happiness, are as crucial as other socio-economic outcomes.
Economists recognize that subjective wellbeing, or happiness, is an essential characteristic and sometimes a desirable outcome that can motivate our decision-making.
In the last few decades, economics has shifted to include happiness as a measurable and vital part of general wellbeing (Graham, 2005).
The consequence is that typical economic questions now also look at the impact of employment, finances, and other economic metrics on the subjective rating and experience of happiness at individual and country levels.
Theory of the Economics of Happiness
The theory of the economics of happiness can be summarized as follows (Bruni, 2007):
Happiness is such a vital outcome in society and economic activity that it must be involved in policy making. The subjective measure of happiness is as important as other typical measures used in economics.
Many factors can contribute to happiness. In this post, we consider the role of money. The relationship between happiness, or subjective wellbeing, and money is assumed to be positive: More money means greater happiness.
However, the relationship between money and happiness is paradoxical: More money does not guarantee happiness (for an excellent review, see Graham, 2005).
Specifically, low levels of income are correlated with unhappiness. However, as our individual wealth increases and our basic needs are met, our needs change and differ in their importance.
Initially, our happiness is affected by absolute levels of income, but at a certain threshold, we place importance on relative levels of income. Knowing how we rank and compare to other people, in terms of wealth and material possession, influences our happiness.
The relationship between wealth and happiness continues to increase, but only to a certain point; at this stage, more wealth does not guarantee more happiness (Easterlin, 1974; Diener et al., 1993).
This may be at odds with our everyday lived experience. Most of us choose to work longer hours or multiple jobs so that we make more money. However, what is the point of doing this if money does not increase our happiness? Why do we seem to think that more money will make us happier?
History of the economics of happiness
The relationship between economics and happiness originated in the early 1970s. Brickman and Campbell (1971, as cited in Brickman et al., 1978) first argued that the typical outcomes of a successful life, such as wealth or income, had no impact on individual wellbeing.
Easterlin (1974) expanded these results and showed that although wealthier people tend to be happier than poor people in the same country, the average happiness levels within a country remained unchanged even as the country’s overall wealth increased.
The inconsistent relationship between happiness and income and its sensitivity to critical income thresholds make this topic so interesting.
There is some evidence that wealthier countries are happier than others, but only when comparing the wealthy with the poor (Easterlin, 1974; Graham, 2005).
As countries become wealthier, citizens report higher happiness, but this relationship is strongest when the starting point is poverty. Above a certain income threshold, happiness no longer increases (Diener et al., 1993).
Interestingly, people tend to agree on the amount of money needed to make them happy; but beyond a certain value, there is little increase in happiness (Haesevoets et al., 2022).
Measurement challenges
Measuring happiness accurately and reliably is challenging. Researchers disagree on what happiness means.
It is not the norm in economics to measure happiness by directly asking a participant how happy they are; instead, happiness is inferred through:
A combination of happiness and life satisfaction (Bruni, 2007)
Furthermore, happiness can refer to an acute psychological state, such as feeling happy after a nice meal, or a lasting state similar to contentment (Nettle, 2005).
Researchers might use different definitions of happiness and ways to measure it, thus leading to contradictory results. For example, happiness might be used synonymously with subjective wellbeing and can refer to several things, including life satisfaction and financial satisfaction (Diener & Oishi, 2000).
It seems contradictory that wealthier nations are not happier overall than poorer nations and that increasing the wealth of poorer nations does not guarantee that their happiness will increase too. What could then be done to increase happiness?
Can Money Buy Happiness? 5 Research Findings
What is the relationship between income/wealth and happiness? To answer that question, we looked at studies to see where and how money improves happiness, but we’ll also consider the limitations to the positive effect of income.
Money buys access; jobs boost happiness
Overwhelming evidence shows that wealth is correlated with measures of wellbeing.
Wealthier people have access to better healthcare, education, and employment, which in turn results in higher life satisfaction (Helliwell et al., 2012). A certain amount of wealth is needed to meet basic needs, and satisfying these needs improves happiness (Veenhoven & Ehrhardt, 1995).
Increasing happiness through improved quality of life is highest for poor households, but this is explained by the starting point. Access to essential services improves the quality of life, and in turn, this improves measures of wellbeing.
Most people gain wealth through employment; however, it is not just wealth that improves happiness; instead, employment itself has an important association with happiness. Happiness and employment are also significantly correlated with each other (Helliwell et al., 2021).
Lockdown on happiness
The World Happiness Report (Helliwell et al., 2021) reports that unemployment increased during the COVID-19 pandemic, and this was accompanied by a marked decline in happiness and optimism.
The pandemic also changed how we evaluated certain aspects of our lives; for example, the relationship between income and happiness declined. After all, what is the use of money if you can’t spend it? In contrast, the association between happiness and having a partner increased (Helliwell et al., 2021).
Wealthier states smile more, but is it real?
If we took a snapshot of happiness and a country’s wealth, we would find that richer countries tend to have happier populations than poorer countries.
For example, based on the 2021 World Happiness Report, the top five happiest countries — which are also wealthy countries — are Finland, Iceland, Denmark, Switzerland, and the Netherlands (Helliwell et al., 2021).
In contrast, the unhappiest countries are those that tend to be emerging markets or have a lower gross domestic product (GDP), e.g., Zimbabwe, Tanzania, and India (Graham, 2005; Helliwell et al., 2021).
At face value, this makes sense: Poorer countries most likely have other factors associated with them, e.g., higher unemployment, more crime, and less political stability. So, based on this cross-sectional data, a country’s wealth and happiness levels appear to be correlated. However, over a more extended period, the relationship between happiness and GDP is nil (Easterlin, 2004).
That is, the subjective wellbeing of a population does not increase as a country becomes richer. Even though the wealth of various countries worldwide has increased over time, the overall happiness levels have not increased similarly or have remained static (Kahneman et al., 2006). This is known as a happiness–income paradox.
Easterlin (2004) posits four explanations for this finding:
Societal and individual gains associated with increased wealth are concentrated among the extremely wealthy.
Our degree of happiness is informed by how we compare to other people, and this relative comparison does not change as country-wide wealth increases.
Happiness is not limited to only wealth and financial status, but is affected by other societal and political factors, such as crime, education, and trust in the government.
Long-term satisfaction and contentment differ from short-term, acute happiness.
Kahneman et al. (2006) provide an alternative explanation centered on the method typically used by researchers. Specifically, they argue that the order of the questions asked to measure happiness and how these questions are worded have a focusing effect. Through the question, the participant’s attention to their happiness is sharpened — like a lens in a camera — and their happiness needs to be over- or underestimated.
Kahneman et al. (2006) also point out that job advancements like a raise or a promotion are often accompanied by an increase in salary and work hours. Consequently, high-paying jobs often result in less leisure time available to spend with family or on hobbies and can cause more unhappiness.
Not all that glitters is gold
Extensive research explored whether a sudden financial windfall was associated with a spike in happiness (e.g., Sherman et al., 2020). The findings were mixed. Sometimes, having more money is associated with increased life satisfaction and improved physical and mental health.
This boost in happiness, however, is not guaranteed, nor is it long. Sometimes, individuals even wish it had never happened (Brickman et al., 1978; Sherman et al., 2020).
Consider lottery winners. These people win sizable sums of money — typically more extensive than a salary increase — large enough to impact their lives significantly. Despite this, research has consistently shown that although lottery winners report higher immediate, short-term happiness, they do not experience higher long-term happiness (Sherman et al., 2020).
Here are some reasons for this:
Previous everyday activities and experiences become less enjoyable when compared to a unique, unusual experience like winning the lottery.
People habituate to their new lifestyle.
A sudden increase in wealth can disrupt social relationships among friends and family members.
Work and hobbies typically give us small nuggets of joy over a more extended period (Csikszentmihalyi et al., 2005). These activities can lose their meaning over a longer period, resulting in more unhappiness (Sherman et al., 2020; Brickman et al., 1978).
Sherman et al. (2020) further argue that lottery winners who decide to quit their job after winning, but do not fill this newly available time with some type of meaningful hobby or interest, are also more likely to become unhappy.
Passive activities do not provide the same happiness as work or hobbies. Instead, if lottery winners continue to take part in activities that give them meaning and require active engagement, then they can avoid further unhappiness.
Happiness: Is it temperature or climate?
Like most psychological research, part of the challenge is clearly defining the topic of investigation — a task made more daunting when the topic falls within two very different fields.
Nettle (2005) describes happiness as a three-tiered concept, ranging from short-lived but intense on one end of the spectrum to more abstract and deep on the other.
The first tier refers to transitory feelings of joy, like when one opens up a birthday present.
The second tier describes judgments about feelings, such as feeling satisfied with your job. The third tier is more complex and refers to life satisfaction.
Across research, different definitions are used: Participants are asked about feelings of (immediate) joy, overall life satisfaction, moments of happiness or satisfaction, and mental wellbeing. The concepts are similar but not identical, thus influencing the results.
6 Fascinating Books and Podcasts on the Topic
Most books on happiness economics are textbooks. Although no doubt very interesting, they’re not the easy-reading books we prefer to recommend.
Instead, below you will find a range of books written by economists that explore happiness. These should provide a good springboard on the overall topic of happiness and what influences it, in case any of our readers want to pick up a more in-depth textbook afterward.
If you have a happiness book you would recommend, please let us know in the comments section.
1. Happiness: Lessons from a New Science – Richard Layard
Richard Layard, a lead economist based in London, explores in his book if and how money can affect happiness.
Layard does an excellent job of introducing topics from various fields and framing them appropriately for the reader.
The book is aimed at readers from varying academic and professional backgrounds, so no experience is needed to enjoy it.
2. Happiness by Design: Change What You Do, Not How You Think – Paul Dolan
This book has a more practical spin. The author explains how we can use existing research and theories to make small changes to increase our happiness.
Paul Dolan’s primary thesis is that practical things will have a bigger effect than abstract methods, and we should change our behavior rather than our thinking.
The book is a quick read (airport-perfect!), and Daniel Kahneman penned the foreword.
3. The Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness – Morgan Housel
This book is not necessarily about happiness economics, but it is close enough to the overall theme that it is worth mentioning.
Since most people are concerned with making more money, this book helps teach the reader why we make the decisions we do and how we make better decisions about our money.
This book is a worthwhile addition to any bookcase if you are interested in the relationship between finances and psychology in general.
4. Happiness: The Science Behind Your Smile – Daniel Nettle
If you are interested in happiness overall, then we recommend Happiness: The Science Behind Your Smile by Daniel Nettle, a professor of behavioral science at Newcastle University.
In this book, he takes a scientific approach to explaining happiness, starting with an in-depth exploration of the definition of happiness and some of its challenges.
The research that he presents comes from various fields, including social sciences, medicine, neurobiology, and economics.
Because of its small size, this book is perfect for a weekend away or to read on a plane.
One of our favorite podcasts is Intelligence2, where leading experts in a particular field gather to debate a particular topic.
One episode is dedicated to the debate on whether money can buy happiness. The debaters do not limit themselves to only the topic of happiness — what it is, how to measure it — but extend into other practical topics such as policy making and how this can be adjusted to change the happiness of a population.
Another interesting spin on the happiness economics topic is how altruism can increase happiness, specifically by donating money to others.
This show’s host, Dr. Laurie Santos, argues that we can increase our happiness by not hoarding our money for ourselves but by giving it to others instead. If you are interested in this episode, or any of the other episodes in the Happiness Lab podcast series, then head on over to their page.
Resources From PositivePsychology.com
There are several resources available at PositivePsychology.com for our readers to use in their professional and personal development.
In this section, you’ll find a few that should supplement any work on happiness and economics. Since the undercurrent of the topic is whether happiness can be improved through wealth, a few resources look at happiness overall.
Valued Living Masterclass
Although knowledge is power, knowing that money does not guarantee happiness does not mean that clients will suddenly feel fulfilled and satisfied with their lives.
For this reason, we recommend the Valued Living Masterclass, for professionals to help their clients find meaning in their lives. Rather than keeping up with the Joneses or chasing a high-paying job, professionals can help their clients connect with their inner meaning (i.e., their why) as a way to find meaning and gain happiness.
Read our post on Success Versus Happiness for further information on balancing happiness with success, in any domain. This topic is poignant for readers who conflate happiness and success, and will guide readers to better understand their relationship and how the two terms influence each other.
For readers who wonder about altruism, you would find it interesting that rather than hoarding, you can increase your happiness through volunteering and donating. In this post, the author, Dr. Jeremy Sutton, does a fabulous job of approaching altruism from various fields and provides excellent resources for further reading and real-life application.
Our last recommendation is for readers who want to know more about measuring subjective wellbeing and happiness. The post lists various tests and apps that can measure happiness and the overall history of how happiness was measured and defined. This is a good starting point for researchers or clinicians who want to explore happiness economics professionally.
17 Meaning & Valued Living Exercises
Lastly if you’re looking for more science-based ways to help others discover meaning, check out this collection of 17 validated meaning tools for practitioners. Use them to help others choose directions for their lives in alignment with what is truly important to them and can make them happy.
A Take-Home Message
As you’ve seen in our article, the evidence overwhelmingly clarifies that money does not guarantee more happiness … well, long-term happiness.
Our happiness is relative since we compare ourselves to other people, and over time, as we become accustomed to our wealth, we lose all the happiness gains we made.
Money can ease financial and social difficulties; consequently, it can drastically improve people’s living conditions, life expectancy, and education.
Improvements in these outcomes have a knock-on effect on the overall experience of one’s life and the opportunities for one’s family and children. Nevertheless, better opportunities do not guarantee happiness.
Our intention with this post was to illustrate some complexities surrounding the relationship between money and happiness.
Knowing that money does not guarantee happiness, we recommend less expensive methods to improve one’s happiness:
Spend time with friends.
Cultivate hobbies and interests.
Stay active and eat healthy.
Try to live a meaningful life.
Give some love (go smooch your partner or tickle your dog’s belly).
Diamonds might be a girl’s best friend, but money is a fair weather one, at best.
Brickman, P., Coates, D., & Janoff-Bulman, R. (1978). Lottery winners and accident victims: Is happiness relative? Journal of Personality and Social Psychology, 36(8), 917.
Bruni, L. (2007). Handbook on the economics of happiness. Edward Elgar.
Clark, A. E. (2018). Four decades of the economics of happiness: Where next? Review of Income and Wealth, 64(2), 245–269.
Csikszentmihalyi, M., Abuhamdeh, S., & Nakamura, J. (2005). Flow. In A. J. Elliot & C. S. Dweck (Eds.), Handbook of competence and motivation (pp. 598–608). Guilford Publications.
Diener, E., Sandvik, E., Seidlitz, L., & Diener, M. (1993). The relationship between income and subjective well-being: Relative or absolute? Social Indicators Research, 28, 195–223.
Diener, E., & Oishi, S. (2000). Money and happiness: Income and subjective well-being across nations. Culture and Subjective Well-Being, 185, 218.
DiMaria, C. H., Peroni, C., & Sarracino, F. (2020). Happiness matters: Productivity gains from subjective well-being. Journal of Happiness Studies, 21(1), 139–160.
Easterlin, R. A. (1974). Does economic growth improve the human lot? Some empirical evidence. In P. A. David & M. W. Reder (Eds.), Nations and households in economic growth: Essays in honor of Moses Abramovitz (pp. 89–125). Academic Press.
Easterlin, R. A. (2004). The economics of happiness. Daedalus, 133(2), 26–33.
Graham, C. (2005). The economics of happiness. World Economics, 6(3), 41–55.
Haesevoets, T., Dierckx, K., & Van Hiel, A. (2022). Do people believe that you can have too much money? The relationship between hypothetical lottery wins and expected happiness. Judgment and Decision Making, 17(6), 1229–1254.
Helliwell, J., Layard, R., & Sachs, J. (Eds.) (2012). World happiness report. The Earth Institute, Columbia University.
Helliwell, J. F., Layard, R., Sachs, J. D., & Neve, J. E. D. (2021). World happiness report 2021.
Kahneman, D., Krueger, A. B., Schkade, D., Schwarz, N., & Stone, A. A. (2006). Would you be happier if you were richer? A focusing illusion. Science, 312(5782), 1908–1910.
Nettle, D. (2005). Happiness: The science behind your smile. Oxford University Press.
Sherman, A., Shavit, T., & Barokas, G. (2020). A dynamic model on happiness and exogenous wealth shock: The case of lottery winners. Journal of Happiness Studies, 21, 117–137.
Steptoe, A. (2019). Happiness and health. Annual Review of Public Health, 40, 339–359.
Veenhoven, R., & Ehrhardt, J. (1995). The cross-national pattern of happiness: Test of predictions implied in three theories of happiness. Social Indicators Research, 34, 33–68.
About the author
Alicia Nortje, Ph.D. is a research fellow at the University of Cape Town, where she is involved in multiple projects investigating eyewitness memory and face recognition. She’s highly skilled in research design, data analysis, and critical thinking. When she’s not working, she indulges in running on the road or the trails, and enjoys cooking.
Do you ever daydream about winning the lottery?
The theory of the economics of happiness can be summarized as follows (Bruni, 2007):
