The richness of life: Does money buy happiness?

This eternal question is a topic that has long been discussed and remains unanswered. Those who have the financial means say they can't buy happiness, but those who aren't lucky can only feel that it will solve all their problems. How do we know who is right and who is wrong?

One place where we might get some answers is where economics, psychology, and biology – behavioral economics meet. Behavioral economics is the study of how humans and our psyche interact with money. So, what has this field of behavioral economics discovered about money and happiness? Let's find out.

How much money makes us happy?

One landmark study published in 2010, conducted by Daniel Kahneman and Angus Deaton, concluded that about $75,000 a year is the right amount of money for someone to feel comfortable and happy (in the USA). To reach this conclusion, 450,000 U.S. citizens were asked how to rate their lives on a scale of 1 to 10 (1 is the worst ever and 10 is the best ever), as well as their income.

Clear differences were observed between people's answers regarding income. U.S. citizens earning less than $75,000 rated their lives lower in terms of luxury and reported being more troubled in stressful situations. However, the negative impact was less as income increased, and individuals reported feeling more positive.

A new study published in Nature in 2018 updated 2010 figures and found that $60,000 to $75,000 is enough for a person to achieve emotional well-being. But a person achieves true life satisfaction if he earns $ 95,000 per year.

Theory of need

There was a theory proposed in the forties that was consistent with the findings of Daniel Kahneman known as the theory of need. It states that an increase in money has the strongest impact when it allows people to meet their basic needs. These include access to adequate food, clothing, sanitation and shelter. Once these needs are met, the extra money doesn't affect happiness levels much. Although it may also be because higher needs are not material but are more oriented towards feelings of belonging, love, respect and the development of self-identity.

More money doesn't always mean more happiness

Similarly, the more money a person has, the happier they become, but only to a certain extent. After a certain point, more money does not lead to a corresponding increase in happiness.

Let's take two people, A and B. If A gets $50,000 a year and B gets $250,000 a year, both of which get a $5,000 bonus, person A would be more appreciative of it. The reason for this is that an increase in annual income by more than $95,000 no longer improves an individual's basic quality of life, as they already have the ability to do what is more important to their emotional well-being.

Adaptation theory

However, there is a proposed theory that talks about why happiness levels do not increase after a certain point, but rather decrease them slightly. This is called the adaptation theory, which says that rising incomes will temporarily increase people's happiness, but over time they will get used to living on a higher income, their gaze rises to the top, then adaptation comes to a new high level, and chasing the next big thing can lead to dissatisfaction. As such, their happiness levels return to what they were before.

Physical purchases vs. experiential expertise

Conversely, one study suggested that spending on experimental trials rather than making physical purchases is likely to increase psychological satisfaction. Another study found that people with greater financial security were happier and as a result their higher needs were easily met.

This does not necessarily mean that if someone earns less, they will certainly be unhappy. It's just that there are more chances that people will experience more emotional pain and stress if they don't earn a significant income.

Social comparative theory:

Another theory that comes into account is the theory of social comparison. This theory suggests that people compare their income and achievements with their peers. So, if a person's friend earns a higher income, that person may feel more frustrated or upset about their situation, leading to reduced life satisfaction.

Differences in culture

Studies show that culture affects happiness levels as well. Different cultures have different values. In cultures that value money, a higher level of income will make individuals happier.

A study reported that the threshold value for Europeans is €27,913 (about $35,000). This is a big difference from the US estimates. That's because a person's culture, personality, upbringing, and life experiences affect their overall happiness levels. However, it is difficult to determine an exact figure for the impact of culture on a person's happiness because people's actions vary.

Similar research has been conducted in other cities as well, such as Turkey, where it was found that Turkish citizens also reported an increase in happiness levels if they got more money. Interestingly, the research reported that women are less interested in financial status or income levels than men.

The illusion of concentration

The study of the relationship between money and happiness contains many gray areas. And one of them is the illusion of concentration.

By asking participants to rate their happiness with their income, we make participants overestimate the degree of happiness money can buy.

Now, to answer the main question, yes, money buys happiness, but only to some extent. After a certain point, the increase in money you make doesn't affect the way you feel about your life, and you may start looking for other ways to find happiness. Or maybe it's not about how much you make, but how you spend it.

Money is important for living a comfortable life and for providing necessities and amenities, along with a certain level of security. However, after a certain point, money can not buy us more happiness. In the words of Mahatma Gandhi, "The world has enough for everyone's needs, but not for everyone's greed.