Imagine you are
given the option to live in one of two worlds:
In the first
world your annual income is $50 thousand dollars a year, while other people average
$25 thousand dollars a year.
In world two your
annual income is $100 thousand dollars a year, while others get on average $250
thousand dollars a year.
Which world would you choose to live in?
Which world would you choose to live in?
This question
was brought to the attention of Harvard students. The majority of students chose to
live in the first world (Solnik and Hemenway, 1998). The students generally agreed that they would be
happier being poorer as long as their relative position in society was higher.
This is further backed by other studies that found similar results (Layard, 1999b; Esterlin, 2002). It is studies
like these that show people care a lot about their relative income and they
would be willing to accept a significant lower living standard if they could
move up more when compared to others. Secondly, people also compare their
income with what they themselves have been used to earning. When individuals
are asked how much money they need to survive, wealthier people always say they
need more than poor people (Van Praag and Frijters, 1999).
So, according to
these studies whether you are happy or not with your income depends on how much
it compares to some norm. And that norm depends on two things: what other
people get and what you yourself are used to getting. In the first instance
your feelings are governed by social
comparisons, and in the second habituation (Layard, 2013).
Because these
two forces are so strong in human nature, it can be quite difficult for
economic growth to improve our levels of happiness (Layard, 1980; Frank 1985; Frank 1999). Because as actual incomes rises, so too does
the norm for which income is judged.
Let’s begin talking about social comparisons. I think it is safe to say that most of us like to live in similar styles as our family, friends, and neighbors. When everything is level, people tend to be content. But when the balance changes, we are often compelled to make adjustments to once again create balance. For example, when friends start having elaborate parties, we too feel the need to do them. As they start to get BMW’s and large houses, we too may feel the need to upgrade old faithful. This helps explain the paradox of happiness in much of the world today. Rich people are happier than poor people, but over time richer societies are no happier than poor societies (Layard, 2005).
Let’s begin talking about social comparisons. I think it is safe to say that most of us like to live in similar styles as our family, friends, and neighbors. When everything is level, people tend to be content. But when the balance changes, we are often compelled to make adjustments to once again create balance. For example, when friends start having elaborate parties, we too feel the need to do them. As they start to get BMW’s and large houses, we too may feel the need to upgrade old faithful. This helps explain the paradox of happiness in much of the world today. Rich people are happier than poor people, but over time richer societies are no happier than poor societies (Layard, 2005).
This tends to
relate to income as well. Income is not just a means to buy things. It is often
used as a measure for which we are valued… and if we are not careful, how we
value ourselves. Even if we don’t know the exact numbers we can see how others live and it can affect us.
For the most
part when people compare incomes, they do it with people close to themselves
and not to celebrities or movie stars. Because what your “references group”
makes is more feasible than what Taylor Swift makes (Layard, 2005). Because these comparisons
often happen at such close quarters, some of the most intense disputes are
often within organizations and families. In organizations, balance is often set
in place by keeping salaries a secret. In families it can be a different story.
One study found that the more money your spouse makes, the less satisfied you
are with your own job (Clark, 1996). Also among married women, another study found that
if your sister’s husband is making more than your husband, than you are more
likely to seek out work (Clark, 2003). Basically
people are concerned about their relative income and not simply about the raw
amount. People want to keep up with the
Joneses and if possible… outdo them.
So how much in
fact is a person’ happiness affected by their own income compared to others?
One study suggests that if everyone else earned an extra 1%, their own
happiness would fall one-third as much as it would rise if they received the 1%
increase themselves (Blanchflower and Oswald, 2004). Another study found that happiness (when looking at income) depends only on your income relative to your income aspirations.
Your income aspirations in turn depend heavily on the average income of those
around you (Stutzer, 2003). These studies show that a rise in other people’s incomes hurts
your happiness.
Tip one to happiness: In an experiment people were given a task to complete while sitting next to a stranger (a secret experimenter) who was doing the same task. The aim of the study was to see how the subject’s mood was affected by whether the stranger did better or worse at the task. Not surprisingly, everyone’s mood increased when they did better than the stranger. But only unhappy people’s moods deteriorated if they did worse than the stranger. So the first secret of happiness regarding income is to ignore comparisons with people who earn more than you: always compare downwards, not upwards.
To illustrate this point, take research pertaining to the Olympic games. In the Olympics a bronze-medalist consistently reports feeling happier about their results than silver-medalists. This is because the bronze-medalist compares their results to people who received no medal, while the silver-medalist often believes they should have got gold (Medvec et al, 1995).
Tip one to happiness: In an experiment people were given a task to complete while sitting next to a stranger (a secret experimenter) who was doing the same task. The aim of the study was to see how the subject’s mood was affected by whether the stranger did better or worse at the task. Not surprisingly, everyone’s mood increased when they did better than the stranger. But only unhappy people’s moods deteriorated if they did worse than the stranger. So the first secret of happiness regarding income is to ignore comparisons with people who earn more than you: always compare downwards, not upwards.
To illustrate this point, take research pertaining to the Olympic games. In the Olympics a bronze-medalist consistently reports feeling happier about their results than silver-medalists. This is because the bronze-medalist compares their results to people who received no medal, while the silver-medalist often believes they should have got gold (Medvec et al, 1995).
This time we can start with introspection. When we get a new car or outfit, we are
excited at first. But then we get used to it and our mood reverts back to where
it was before. Now we feel the need to get a better car or outfit to reach that
excitement again. If we ever were to go back to the old car, we would feel less
happy than before we experienced something better. So much in the same, living standards are much
like alcohol or drugs. Once we have a new experience, we need to keep having
more to sustain happiness. In psychology this is known as adaptation. When
adaptation is complete only continued new stimuli can raise your well-being.
Once your situation becomes stable again, you will revert back to your set
point level of happiness. This happens whether the outcome is for better or for
worse.
Adaptation is common in the real world. It can act as a great insurance policy when things do not go so well but can dampen our joy when things go right. People adapt to certain things completely but some miseries people never fully adjust to such as loud and unpredicted noises, widowhood, and taking care of a parent with Alzheimer’s. There are good things that we do not adapt to either like sex, friends, and even to some extent marriage (Frederick and Loewenstein, 1999; Clark et al. 2003). Tip two to happiness: seek out those things that we never adapt to.
Adaptation is common in the real world. It can act as a great insurance policy when things do not go so well but can dampen our joy when things go right. People adapt to certain things completely but some miseries people never fully adjust to such as loud and unpredicted noises, widowhood, and taking care of a parent with Alzheimer’s. There are good things that we do not adapt to either like sex, friends, and even to some extent marriage (Frederick and Loewenstein, 1999; Clark et al. 2003). Tip two to happiness: seek out those things that we never adapt to.
So how far do we
adapt to income? The simplest approach would be to see how people’s actual
incomes affect the income, in which they actually need (Van Praag and Frijters, 1999). This was done by
asking people “what after-tax income for your family would you consider to be:
very bad, bad, insufficient, sufficient, good and very good?” From the answers
people give, the mid-point between insufficient and sufficient is then found.
This is called “required income.” This study found that people’s "required
income" varies greatly depending on what people are used to making. A dollar
raise in experienced income causes at least a 40 cent raise in “required
income" (Van Praag and Frijters, 1999). So when I earn a dollar extra this year, it makes me happier, but
next year I measure my income from a benchmark that is 40 cents higher. In this
sense at least 40% of this year’s gain is “wiped out” next year.
That is the measure of our addiction to income. The things that we get used to most easily and take for granted are our material possession such as our car or clothing. Advertisers understand this and invite us to “feed our addictions” with more and more spending. However, other experiences do not seem less impressive in the same way… the time we spend with family, friends, and the quality and security of our job (Frank, 1999; Frey and Stutzer, 2003).
Moral time: If we do not foresee that we get used to our natural possessions, we shall over-invest in acquiring them, at the expense of our leisure. People do underestimate this process of habituation (Layard, 2005). As a result, our life can be distorted toward working and making money, and away from other important pursuits.
References
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Frank, R. (1985). Choosing the right pond: Human behavior and the quest for status. New York and Oxford: Oxford University Press.
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