Daniel Kahneman on happiness and wealth

by on January 1, 2008 at 11:21 pm in Economics | Permalink

We had thought income effects are small because we were looking within
countries. The GDP differences between countries are enormous, and
highly predictive of differences in life satisfaction. In a sample of
over 130,000 people from 126 countries, the correlation between the
life satisfaction of individuals and the GDP of the country in which
they live was over .40 – an exceptionally high value in social science.
Humans everywhere, from Norway to Sierra Leone, apparently evaluate
their life by a common standard of material prosperity, which changes
as GDP increases. The implied conclusion, that citizens of different
countries do not adapt to their level of prosperity, flies against
everything we thought we knew ten years ago. We have been wrong and now
we know it. I suppose this means that there is a science of well-being,
even if we are not doing it very well.

Here are Kahneman’s full remarks.  He also presents a more complete theory of happiness, namely that is determined by basic personality type and which activities you are able to do during the course of your day, the latter being a function of wealth.  That excerpt is from this post by Arnold Kling, on how people have changed their minds, read this one too.  Here is the core source, highly recommended, it is one of the best hour-wasters you will get this year.

jonm January 2, 2008 at 2:29 am

The whole Kahneman article is indeed interesting, but I’m not sure why he is surprised that GDP is correlated with life satisfaction, since this is clearly shown in the results of the World Values Surveys from 1996 and before.

The results from both the World Values Surveys and the Gallup World Poll Kahneman refers to are graphed and discussed in http://www.princeton.edu/~rpds/downloads/Deaton_Aging_and_wellbeing_around_the_world_All_July_07.pdf

odograph January 2, 2008 at 10:05 am

I thought the missing thing in the article was “declining returns” (on happiness from higher wealth).

I think we know it makes a great deal of difference to happiness and life satisfaction that you (and your nation) climb out of poverty. The question for Americans is what you do once you have affluence? Is further affluence the best path? Or do you start thinking about health, fitness, and the world around you?

Barkley Rosser January 2, 2008 at 2:57 pm

A lot of issues here. First a terminological one, relevant to Finnsense:
the term for short-term the psychological state is “happiness,” while the term
for the longer term one is “satisfaction,” at least as used by social scientists
such as Kahnemann (and him in particular). So, the average one of his 500 Ohio
women is happy having “intimate relations” and unhappy “commuting,” and also is
happy being around friends and unhappy being around her boss. This moment-to-
moment happiness is what is unrelated to income or wealth levels.

What is related is income/wealth, although at the level of what Kahnemann et al
study, this is not inconsistent with the Easterlin Paradox. The original Easterlin
Paradox had two parts, only one of them mentioned in the comments. That part is
that happiness does not seem to rise as income levels rise within a country over
time. The second part, which can be argued not to be “paradoxical” as it accords
with our expectations and common sense, is that at any time within a country,
higher income/wealth is correlated with higher levels of happiness or satisfaction
(which in turn have a high correlation, on the order of .8 or so, last time I checked,
but not perfect). Needless to say, this last provides the answer to those who say
“look at an individual’s wealth/income.” We know the answer to that one already.

Now, things get trickier when we get to these cross-country comparisons. Now,
Kahnemann refers to this recent global Gallup poll study, about which there has been
a lot of publicity. The claim is made, as he does, that this somehow undoes Easterlin’s
findings. Well, maybe, but I warn that so far this is an isolated study, and eyeballing
earlier studie available at Veenhoven’s happiness data base in Rotterdam, I remember
seeing some groups of not-well off countries that tended to rank high on the happiness
index, notably many in Central America (manana anyone?).

More seriously is the really enormous amount of data that is out there that supports
the basic Easterlin argument. Time series of happiness within particular countries
do not show happiness rising with income. Let me remind everyone that Easterlin’s
original study in the 1970s was of Japan, where income had just finished rising at more
than 10% annual rates for a couple of decades. Bottom line: no increase in reported
happiness, but of course the usual “rich are happier than the poor.” Same thing with
the US. I have yet to see any data challenging the finding that Americans reported
being happiest in 1956, with if anything the trend since then being a long, if only
slight and gradual, decline, pretty much.

So, if the isolated buy much hyped Gallup poll result is to be consistent with this
truly enormous mass of data out there, this suggests that these relationships have
been in place for a very long time. Now, that is not impossible, as I guess the
relative standing and rank order of countries in income has not changed too sharply
over the last half century or so, with some obvious major movements involving East
Asia compared to the rest of the world, and with a relative decline of the Soviet
bloc. Outside of these zones, many countries have not shifted to much in their
relative ranks, especially broadly speaking (rich vs middle income vs poor). So,
I guess it is possible that there is as high as .4 of a correlation between income
of a country and its average reported happiness, even as there has been almost no
change in happiness as income has changed a lot within a country, with again, Japan
being over the longer haul maybe the most dramatically changed of any with respect
to its real per capita income, and happiness did not rise.

So, there is a bit of a mystery here, but not any clear disproof of Easterlin.

To John Dewey: the adaptationist argument says that even those really sick people
tend to adjust to their illnesses after awhile, and there is a lot of evidence of
this. Of course, if someone is in a downward spiral, well, then they are constantly
behind, and it is not surprising that they will come out as less happy than they
usually are or have been.

Finally, something that I keep seeing completely contradictory findings on (will
not provide competing sources, but could) is on the relationship between age and
happiness. I have seen it argued both that happiness declines from youth to middle
age and then rises and just the opposite, that happiness maxes out in middle age.
I note that the answer to this is not unconnected to the arguments about income,
as real per capita income or earnings tends to max out in middle age.

mpowell January 2, 2008 at 3:33 pm

Odograph hits on the interesting question and I don’t find Dewey’s responses very helpful. First, should I only be planning for my old age? What if I’m much happier when I’m in my 40s and 50s if I spend my youth preparing to make a ton of money? On the other hand, if that’s the case, why don’t I just try to enjoy my 20s and 30s?

I do agree that health and affluence are not mutually exclusive. But I do maintain that there is a distinct conflict between affluence, health and leisure time for most of our lives for those of us who cannot make money on just good-looks (the way, perhaps, an actor can).

Rafe Furst January 2, 2008 at 6:19 pm

It seems entirely possible that the data is changing rapidly with globalization and in particular the spread of information about how one’s “neighbors” on the other side of the world live. The other thing that has happened recently is the gap between the wealthiest and average has increased dramatically. So not only can you now see more neighbors’ lawns, they are looking greener than ever.

Winton bates January 2, 2008 at 11:03 pm

Since the average happiness levels in most high income countries were already high 40 years ago, it is seems to me that it would not make much sense to expect further increases to occur as per capital income rises. If someone gave a 10 out of 10 rating to their life satisfaction forty years ago, what rating could they be expected to give now that their income has risen further?

It seems to me that people probably take into account future economic prospects when asked how satisfied they are with life as a whole. This suggests that, over a few decades, average life satisfaction in high income countries may tend to rise (decline) in countries where per capita incomes rise more (less) than some relevant average (eg the average rate of per capita income growth in OECD countries). However, I am not aware of any research that has attempted to test this.

John Dewey January 3, 2008 at 8:27 am

mpowell: “But I do maintain that there is a distinct conflict between affluence, health and leisure time for most of our lives”

I do not understand how there is a conflict between affluence and health. I have known way too many healthy, affluent people to accept your assertion without some statistics or strong rational arguments.

IMO, a single human trait – self-discipline – is one of a few key factors in achieving both wealth and health. I am not discounting the intelligence factor in wealth accumulation or the role of genetics in overall health. But all the smarts in the world and all the good genes cannot usually overcome lack of discipline. Barkley Rosser, for example, did not become a successful mathematical economist just because his father was a genius.

Certainly humans need balance in their lives. But I still contend that health is the most important determinant of late life happiness. Barkley wrote about adaptation to poor health, which I am certain helps many. But any data from interviews with the aged must be suspect due to survivor bias. Those whose health problems prevented them from reaching their 70’s or even late 60’s would certainly have agreed on the importance of good health.

John Dewey January 3, 2008 at 10:41 am

Barkley: “that relation, happiness dropping from 20s to 40s then rising to 60s and
flattening out, does not hold in the formerly socialist transition economies”

Could that be partially explained by reduced standards of living for retirees? I’ve heard stories – anecdotal evidenc, not studies – that the collapse of socialism left the elderly unprepared for free market life. Perhaps the transition period for such economies exceeds even a full generation.

Barkley: “BTW, regarding my father, well, I did have access to certain elements of education not available
to most people…”

No doubt you did. But I am confident that not all the children of Ivy League professors have been equally successful in careers they pursued. I’m also confident that a middle class upbringing, with a childhood education in public schools, does not prevent one from achieving success in economics. Ben Bernanke and Donald Boudreaux come to mind.

Would you give more weight to opportunity or to work ethic in explaining your personal achievements?

Barkley Rosser January 7, 2008 at 12:15 pm

John D.,

For what it is worth, I attended public schools. By access to education,
I was referring to the fact that my father personally taught me things
about higher math not taught in any schools, at least outside of selected,
advanced grad seminars.

I am regularly accused of being a “workaholic,” and nobody ever suggested
that my father lacked a work ethic. He used to refuse to watch TV because
“it is a waste of time,” although he watched for about a half an hour after
Khrushchev was deposed, only to return to his work thereafter, declaring,
“these people do not know what they are talking about.”

二宮沙樹 July 28, 2008 at 7:19 am

Very nice article! Thanks for this!

Rick P April 9, 2009 at 10:11 am

This researcher is proud of a .4 correlation?? Correlation measures the statistical likelihood that one variable is causal to another. This .4 measurement implies that 40% of the “happiness” is caused by GDP. This means that the other 60% can be attributed to other variables. These could include distribution of wealth in each society, level of freedom, stability of government, war, etc. Whether or not wealth causes happiness, this study tells us little.

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