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Friday, March 02, 2007

Money CAN (repeat, CAN) make you happier

There are those who say "money cannot buy happiness" and indeed there are activists and measures that purport to show that those who are more wealthy are less happy than those who are less wealthy.

However, such distinctions confuse the value of money in obtaining satisfaction and the loss of satisfaction required to gather money. Utility, or satisfaction, is generated through consumption - whether you are consuming Bentley's or apples. Consumption has two costs: time and money (or some other means of exchange). Time and money constrain how much individuals can consume (regardless of what they are consuming).

For most people, to earn income requires time, and this detracts from the ability to consume. On the other hand, if one is consuming, it is difficult to work and earn income. There is a tradeoff between consuming, which makes us happy, and earning income, which is typically thought to make us less happy (hence the reason we normally have to get paid to work).

As one's income increases it is possible to consume more of all goods, and it is also possible to work a bit less and have more time to comfortably enjoy those goods.

Unfortunately, most people do not win a large lottery prize and must continue to work in order to maintain their high income. If a substantial amount of work (i.e., time) is required to earn a high income, it is entirely possible that individuals feel less happy even as they earn more income. This is because they are working harder to earn more income, thereby losing utility. The causation is not from money to unhappiness but from work to unhappiness.

Most economists would admit that money alone cannot make you more happy (unless you obtain utility from holding dollars). However, having more money expands the opportunities to consume, not only more Bentley's but also more quiet Thursday afternoons in the mountains. This is why economists would claim that money alone won't make you happy but it definitely makes it easier to be happier.

The poster-child of the "money can't buy you happiness" crowd is the winner of a large lottery jackpot who, after the windfall, ends up unhappy, broke, dead, or some combination thereof.

Yet it doesn't have to be that way.

Check out this story about a lottery winner who spent his money in the following way:

  • $45 million: Safe, low-risk investments such as municipal bonds
  • $35 million: Aggressive investments like oil and gas and real estate
  • $1.3 million: A family foundation
  • $63,000: A trip to Tahiti with 17 friends
  • $125,000: Mortgage retired on his 1,400-square-foot house
  • $18,000: Student-loan repayment
  • $65,000: New bicycles, including a $12,000 BMC road bike
  • $14,500: A used black VW Jetta
  • $12,000: Annual gift to each family member

    His goal is to be worth $1 billion in 10 years (2015). I might question spending as much on a bicycle as on a car, but there's no accounting for taste. I like the $12,000 annual gift to the family members - that's how I would play it if I ever hit the big one.

    The story is worth a read and shows that it is possible to be more happy with more money.

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