What makes people happier – money or status?

A new study by researchers at the University of Warwick finds that money only makes people happier if it improves their social rank.

A well known example of this effect was documented by economist Robert H Frank. He asked people if they would prefer to live in a 4,000 ft² house where all the neighbouring houses were 6,000 ft², or in a 3,000 ft² house where all the neighbours lived in houses that were 2,000 ft². A majority of respondents chose the 3,000 ft² house – smaller in absolute terms than the first option but larger in relative terms.

Where being brilliantly avaricious counts most? (Cut paper)

This is not a new insight but I think it is very important that planners and architects appreciate it – in fact it is very important for anyone who has clients or who is involved in policy development and implementation. Status matters. The trick is to direct it in ways that are as environmentally, economically and socially benign as possible. Bicycles rather than BMWs!

The researchers were seeking to explain why people in rich nations have not become any happier on average over the last 40 years even though economic growth has led to substantial increases in average incomes.

Lead researcher on the paper, Chris Boyce from the University of Warwick’s Department of Psychology said:

“Our study found that the ranked position of an individual’s income best predicted general life satisfaction, while the actual amount of income and the average income of others appear to have no significant effect. Earning a million pounds a year appears to be not enough to make you happy if you know your friends all earn 2 million a year”

The study, entitled “Money and Happiness: Rank of Income, Not Income, Affects Life Satisfaction”, will be published in the journal Psychological Science. The researchers looked at data on earnings and life satisfaction from seven years of the British Household Panel Survey (BHPS), which is a representative longitudinal sample of British households.

First they examined how life satisfaction was related to how much money each person earned.  They found however that satisfaction was much more strongly related to the ranked position of the person’s income (compared to people of the same gender, age, level of education, or from the same geographical area).

The results explain why making everybody in society richer will not necessarily increase overall happiness – because it is only having a higher income than other people that matters.

Here’s the abstract:

Does money buy happiness, or does happiness come indirectly from the higher rank in society that money brings? We tested a rank-income hypothesis, according to which people gain utility from the ranked position of their income within a comparison group. The rank hypothesis contrasts with traditional reference-income hypotheses, which suggest that utility from income depends on comparison to a social reference-group norm. We found that the ranked position of an individual’s income predicts general life satisfaction, whereas absolute income and reference income have no effect. Furthermore, individuals weight upward comparisons more heavily than downward comparisons. According to the rank hypothesis, income and utility are not directly linked: Increasing an individual’s income will increase his or her utility only if ranked position also increases and will necessarily reduce the utility of others who will lose rank.

Here’s the Introduction:

Is there a true causal relation between money and happiness? According to conventional economics, there is: Money can buy happiness because it can be exchanged for goods that will increase an individual’s utility. Thus, money and happiness are assumed to be causally linked, and higher incomes should lead to greater happiness. In line with this absolute-income hypothesis, richer people are happier than those less well off within the same society (Diener, 1984). The correlation between money and happiness is often small, but effect sizes are larger in low-income developing economies (Howell & Howell, 2008), and even small correlations can reflect substantial real differences in happiness (Lucas & Schimmack, 2009). Such results, however, do not necessarily reflect a simple causal relation between money and happiness. The idea that absolute income leads to increased happiness is unable to account for the Easterlin (1974) paradox—that income and happiness are positively associated within a country at a given time but not (or less well) correlated within a country over time.

Furthermore, being among people richer than oneself can be detrimental to well-being, as measured in various ways (Blanchflower & Oswald, 2004; Clark, Frijters, & Shields, 2008; Clark & Oswald, 1996; Ferrer-i-Carbonell, 2005; Luttmer, 2005), consistent with income comparison. Self-rated happiness and satisfaction scores have been shown to act as valid and reliable proxies for utility (e.g., Lepper, 1998; Sandvik, Diener, & Seidlitz, 1993). The data have therefore been taken to suggest that an individual’s utility is influenced not by absolute level of income, but instead by income relative to that of peers.

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