Finally, the answer to whether money buys happiness

• One half of this collaboration was Princeton University’s Daniel Kahnemann, the 2002 Nobel laureate in economics and author of well-known books such as “Thinking Fast and Slow.” In a 2010 study, he and Angus Deaton, also of Princeton, found that more money is associated with greater happiness only up until a point — $75,000 of annual income, about $100,000 in today’s dollars — but thereafter disappears.
• In the opposing camp was Matthew Killingsworth of the Wharton School at the University of Pennsylvania. He found from his 2021 study that the correlation between money and happiness continues all the way up the income ladder.

But for the willingness of these opposing researchers to collaborate on finding a common answer, their conflicting answers would have remained the state of the art — allowing commentators on both sides to “justify” their positions by reference to whatever study provided confirmation of their prior beliefs. The professors reported their joint findings in a study titled “Income and emotional well-being: A conflict resolved,” published in March in the Proceedings of the National Academy of Sciences.

(As an aside, let me give lots of kudos to the professors for being willing to collaborate in hopes of resolving their disagreements. The protocol they followed—called an “adversarial collaboration,” mediated by a friendly arbiter—is a model for us all.)

One way of interpreting what the researchers found is that the money-happiness correlation depends crucially on whether you’re a happy or unhappy person to begin with. If you’re an unhappy person, then money helps you only to a limited extent. As Killingsworth put it in the wake of the study’s publication, “if you’re rich and miserable, more money won’t help.”

If you’re a happy person, in contrast, then more money is associated with more happiness. In fact, the researchers found, “for the happiest [people]… the association actually accelerates above $100,000.”

In other words, if you’re already happy and already have more than $100,000 in income, more money is associated with an even greater increase in happiness than is the case for those in lower income cohorts. For those in this well-heeled cohort, instead of the money-happiness relationship adhering to the law of diminishing returns, it’s just the opposite — a law of increasing returns.

Even so, the authors of this new study emphasize we should not exaggerate the psychological significance of the money-happiness correlation. Though that correlation is statistically significant, it has only limited ability to explain happiness. This is a subtle but important distinction; statistical significance and psychological significance are not the same thing.

To put in context the relatively weak psychological significance of more income, the authors report that the impact of a “four-fold difference in income is… less than a third as large as the effect of a headache” on a person’s feelings of happiness on a given day.

The bottom line? On the one hand, for those with less than $100,000 of annual income, more money is correlated with greater happiness. On the other hand, for those whose annual incomes are greater, more money is correlated with more happiness if one is already a happy person — and, in any case, other factors besides money have a far greater impact on your day-to-day happiness.

Keep these findings in mind as you construct your financial plan. You may only win a Pyrrhic victory by single-mindedly pursuing more money at the expense of other factors associated with happiness.

https://www.marketwatch.com/story/finally-the-answer-to-whether-money-buys-happiness-93adad0d?mod=home-page