How much happiness does money buy? (Economist.com article)

[SeattleCPA]

I didn't see this until today, but the Economist has an interesting article in their most recent edition about the "Merton framework" and the diminishing marginal utility of wealth: https://www.economist.com/christmas-specials/2024/12/19/how-much-happiness-does-money-buy

You can probably get a free seven day trial to read it if you want. If you've got a subscription or visit the library, worth reading in my opinion.

The TLDR summary:
1. Economists basically all agree that Merton's math and formulas help people optimize their portfolios and spending.
2. Both history and the math suggest Merton is right. So it'd be quite a coincidence if he was wrong.
3. Wealth advisors pretty much ignore Merton's math and probably don't understand the math.
4. Clients and individuals don't care but probably should.
5. You need four inputs which are tricky to grab hold of.

Apologies to anyone tired of me promoting this set of tools.

It is interesting that Merton framework, half a century after Merton did the math, is getting more attention. If I can make an editorial comment about that, partly that's maybe because valuations are so high. (The market today to me looks like it did in late 1990s and for same reasons.) Partly I think this is because we've all got better tools and information today that we did a decade or two or three ago.

[Financial.Velociraptor]

I'm still in touch with a lot of my former cow-orkers.  All of them, except one who retired at a traditional age, are still working.  We have discussed the "why" of me going FIRE and for some of them, when/if they will as well.  I noticed as I moved from entry level work to team lead/senior analyst type work and my wages increased, I genuinely became happier.  Now I was happiest in grad school when I was DEAD broke.  And, I noticed as promotions continued to come the sweet spot for me was around 50k per year (this was in Houston before the Great Recession so that was pretty decent money). Making more money than that made me just an infinitesimally happier but came with drawbacks of additional responsibility that started to feel burdensome.  I could even see a future where the next promotion was a net negative to my happiness.

I have one other cow-orker who says, I felt the same but for me it was about 85k (making 150k now and still working but building towards a second dream career).  Another says 120k.  Yet another sees no upward limit.  Only thing that matters is being able to spend freely and especially (luxury) travel and she will gladly work middle to upper middle management jobs for the oilfield that have her literally closing her office door to cry. 

Anyway, my reasoning is more money wasn't going to make me much happier if at all.  And I was happiest when I had no money.  So if money isn't correlated to happiness, or at least the correlation fails after some constraint level, why in the ever loving hell should I (or anyone) work their ass off to make as much as possible??

None of that is Merton, but it answers, for me, the article's title. 

[blue_green_sparks]

It is the time that is "my own" that brings me happiness and also the reasonable probability that my time will remain mine till the end. That is what my money buys.

The magnitude of slavery, from an economic point of view, is a spectrum.

[ChpBstrd]

We know these things:
1) People are working more/longer than would be optimal for their happiness.
2) People spend more and save less than is optimal for long-term happiness.

We all know careerists like @Financial.Velociraptor 's former colleagues, but we also know of people who achieved FIRE and are much happier due to working less and spending less. A standard post-hoc explanation might be that each such person is probably attempting to optimize their own happiness function. For some, that might mean climbing the career ladder and leasing the luxury SUV. For others, it might mean living a frugal life and retiring in one's 40s. The rational-agent mindset of economics would say that each such person is maximizing their own outcomes, which differ by individual.

I'm not so sure.

Ancient Greece and Rome had different schools teaching philosophies of life, but in the U.S. there is only Consumerism. Consumerism is the expectation that happiness comes from maximizing the amount of consumption. It is culturally normal here to believe we'd be happier if we only had a bigger house, a bigger car, fancy toys, and a bigger salary to pay for it all. These ideas are reinforced by jealousies with our neighbors and by advertising constantly bombarding us with images of smiling, attractive people who we can be if only we make the same consumption decision they fictionally made. Brainwashing and marketing are synonyms here, and we've all come to believe the same thing.

This belief - the philosophy of Consumerism - could lead people to allocate their resources sub-optimally, which is contrary to the expectations of rational-agent economics, and more aligned with psychology. For those of us who took the red pill of Mustachianism, it is crazy to look at some of the things people buy and to realize they expected the purchase to make them happier.

[Wintergreen78]

I worked at a government job for many years. You could retire and start drawing a reduced pension as early as 50, but had to stay until your early 60’s plus have 30+ years of service to retire at a full pension.

A number of people retired early and would come back for small contract jobs from time to time to supplement their pensions. They were invariably happy and well adjusted. Almost everyone in the office who stayed to maximize their pension seemed burned-out and unhappy.

[Financial.Velociraptor]

The rational-agent mindset of economics

So this was the crux of my entire undergrad.  People are rational.  At some point in my senior year, I called "BULLSHIT" and decided against grad work in econ.  There is a thing called Behavioral Economics now where the nerds mathematically model people's actual behavior instead of the theoretical optimum behavior b/c no one truly behaves optimally, even most of the time.

It might be a fun academic exercise to build such models for the typical consumer versus the typical poster here.  Blah blah blah, [something] - indifference curve... 

I have no doubt my cow-orkers are insane.  And that so am I.  Also feel like a find a type of insane that really works for me...

[clarkfan1979]

The rational-agent mindset of economics

So this was the crux of my entire undergrad.  People are rational.  At some point in my senior year, I called "BULLSHIT" and decided against grad work in econ.  There is a thing called Behavioral Economics now where the nerds mathematically model people's actual behavior instead of the theoretical optimum behavior b/c no one truly behaves optimally, even most of the time.

It might be a fun academic exercise to build such models for the typical consumer versus the typical poster here.  Blah blah blah, [something] - indifference curve... 

I have no doubt my cow-orkers are insane.  And that so am I.  Also feel like a find a type of insane that really works for me...

I have a Ph.D. in Applied Social Psychology. I studied social influence (peer pressure) along with judgement and decision making that applied to marketing health behaviors and environmental behaviors to the masses. Daniel Kahneman is a Social Psychologist. The application of Social Psychology to Economics is Behavioral Economics. I could do consulting and help companies sell more widgets. However, I can't do that in good conscious because I feel like Americans already over-consume which is pushing mother earth to her limits. 

I was academically abused by my advisor, so my overall Ph.D. experience wasn't great. Only about 20% of her grad students actually graduate. I came in with a MA, so my Ph.D. should have only been 4 years full-time and maybe one year A.B.D. It ended up being 5 years full-time and 4 years A.B.D. When I would send her another draft of my dissertation it would take her 3-6 months to read it and give me feedback. Industry standard is 2-3 weeks.

However, it was fun to hang out with fellow grad students and learn about the fundamentals of human behavior. Human behavior is difficult to predict. But when you hang out with grad students in Psychology, I kind of feel like we are better at it than the general population. It kind of felt like a special club in which we knew things about human behavior that the rest of the world didn't. Good times.

I do apply those concepts I learned in grad school to consumption and investing. I consume less and invest more than other people with similar wages. I think others on this forum might do it better than me. However, using the knowledge I learned in grad school, I feel like it's pretty easy.

Otani the baseball player hit 50 home runs and stole 50 bases this year, which had never been done in the past. This has inspired me to try to get 50 days of snowboarding and 50 days of golf in 2025. I feel like when I spend more time/money on my hobbies, I am more happy. I'm guessing there is a limit, but I don't think I hit it yet.

[BicycleB]

I find this discussion interesting - it addresses the Economist article's title, but the content of the article itself doesn't! Great answers though. :)

On the article topic, I agree that the work vs play curve is different for different people, but broadly speaking, the value of "more money" appears logarithmic to me. Each additional dollar buys less happiness per dollar than the last. However, for me and I suspect for most people, the value of the extra dollar never goes all the way to zero.

Re Merton, I still have trouble sorting out the underlying data to enter into the equation, even after reading the original Merton thread. But after mentally accepting the conclusion that we're in one of the rare times when "less stock than usual" is probably a good decision, am in the process of shifting behavior accordingly (maybe a bit too slowly; wish me luck, gulp).

[MustacheAndaHalf]

Since I couldn't read the economist article, I looked for something similar, and found:


"Killingsworth's latest research builds on his 2023 study that debunked a much-cited 2010 analysis claiming people's happiness peaked at about $75,000 in annual income, or about $110,000 in today's inflation-adjusted dollars."
...
"Now, Killingsworth has found that happiness rises to even higher levels for the extremely rich, or those with assets between $3 million to $7.9 million, with their life satisfaction far exceeding that of people with mere six figure incomes. The implication is happiness continues to rise alongside one's bank account, with no clear upper limit."
https://www.cbsnews.com/news/money-buys-happiness-study-finds-rich-are-happier-research/


That fits something I noticed: people love flying private.  Buffet had the same car and house for decades, and was so frugal he called his private plane "Indefensible"... but later renamed it to "Indispensable".  I think he's mentioned in an interview that it would be hard to give up flying private.  And various celebrities fly private, with the richest owning their own private plates.

[Geppetto]

My take: there's an inflection point where money ceases to buy security and opportunity (which are insufficient but indispensable ingredients of happiness), and where it can only buy power. I aspire to never hit that inflection point.

Some people might be so good at deploying resources for proper ends that they never hit that inflection point for themselves. Which is a matter of character.

[englishteacheralex]

I'm not going to read the article because of the paywall, but I've listened to a couple of podcasts recently about it.

Just on an intuitive level for myself, I disagree with the old oft-cited idea that happiness peaks at $75k/year or whatever for inflation-adjusted dollars.

There are a lot of things that more money can really improve. The key is to find the right things, which requires a lot of self-awareness and ignoring the larger culture.

Private flying was mentioned--something I'll never have enough money for, but which I can imagine would be amazing. Just upgraded flights would be incredibly helpful for us, but we'll never afford those either. Unfortunately we have to fly at least 13 hours in order to see family, which we have identified as something that brings us joy. The flights are pretty miserable, which means we don't go as often as we'd like...flying is so bad for the environment that also deters us, but that's another story. 

Giving money away in interesting ways is also enormously joyful. Having enough to be generous without a second thought has been one of the great joys of the last few years for us, as our income has increased.

Blowing money on consumer-sucka stuff is clearly not a way to increase joy, at least for me, but there are loads of other amazing ways to spend money in order to increase joy if one is creative.

[bacchi]

Given the competing results, Kahneman and Killingsworth worked together to refine the research. (Cue the TEDX intro) When they looked at the data, what they found was surprising: Unhappy people plateau at $100k.

To reconcile the differences, the two paired up...
[...]
Specifically, for the least happy group, happiness rises with income until $100,000, then shows no further increase as income grows. For those in the middle range of emotional well-being, happiness increases linearly with income, and for the happiest group the association actually accelerates above $100,000.

As Killingsworth said, "Money is just one of the many determinants of happiness." As an example of the first group, I was severely unhappy working 40+ hours/week even though I was making over $100k. Even with a $50k bump in salary, I would've still picked "Very Bad" (to answer "How do you feel right now?" I assume) if I was using Killingsworth's app. Now, if I won the IPO lottery, I would've picked "Very Good" because I'd be out the door when the check cleared.

[less4success]

"Now, Killingsworth has found that happiness rises to even higher levels for the extremely rich, or those with assets between $3 million to $7.9 million, with their life satisfaction far exceeding that of people with mere six figure incomes. The implication is happiness continues to rise alongside one's bank account, with no clear upper limit."
https://www.cbsnews.com/news/money-buys-happiness-study-finds-rich-are-happier-research/

I really hate that they used assets for one side of comparison and income for the other. I bet there are people on this forum with >= $3 million in assets and <= $75k in income (as reported on their tax return).

Anyway... you could try seeing if the original article was archived on https://archive.is

[less4success]

Merton's approach requires estimating the inputs (future equity returns and volatility). They mention that CAPE and VIX+historical as reasonable proxies, but I don't think I could stomach shorting stocks just because my best estimates of future returns+volatility say I should (at some point in time--not saying that would be the case now).

I like the concept, but it doesn't seem practical. I will stick with either a constant allocation or glide path--at least I can mentally justify that, even if things go wrong.

[MustacheAndaHalf]

"Now, Killingsworth has found that happiness rises to even higher levels for the extremely rich, or those with assets between $3 million to $7.9 million, with their life satisfaction far exceeding that of people with mere six figure incomes. The implication is happiness continues to rise alongside one's bank account, with no clear upper limit."
https://www.cbsnews.com/news/money-buys-happiness-study-finds-rich-are-happier-research/

I really hate that they used assets for one side of comparison and income for the other. I bet there are people on this forum with >= $3 million in assets and <= $75k in income (as reported on their tax return).

Anyway... you could try seeing if the original article was archived on https://archive.is

The article concluded that happiness keeps rising beyond $500k/year, but I thought their measurement of happiness and wealth was more interesting than providing two quotes focused on income.  So that split focus was part my fault, part the articles.  Here's a quote about higher incomes from that article:

"The money-happiness curve continues rising well beyond $500,000 a year," Killingsworth told CBS MoneyWatch in an email. "I think a big part of what's happening is that when people h

ave more money, they have more control over their lives."
https://www.cbsnews.com/news/money-buys-happiness-study-finds-rich-are-happier-research/

[windytrail]

For purporting to be about happiness, the article did not discuss it at all. Rather, it seemed to be more about the phenomenon of risk aversion.

If you want to learn about the research of happiness, there is a lot of good material out there, and surprisingly little of the answers have to do with money. For example, see: https://www.harvard.edu/in-focus/happiness/. The famous 80-year old Harvard study found that "Close relationships, more than money or fame, are what keep people happy throughout their lives." Maintaining good health is also important.

Another way to view the source of happiness is through a formula: 50% is genetic, 25% is circumstantial, and 25% is daily habits.

I think that pursuing FIRE is not an end in itself, but rather, a means to stop worrying about money and focus on things that make us truly happy.

[Ron Scott]

You can be perfectly happy being rich. You can have a nice place or 2, a couple nice cars, etc. and be very happy. But if you get into a bad loop of just buying lotsa shit, hoping the next piece will make you happier, it doesn’t work. It’s that loop that doesn’t work.

You can visit all sorts of bulletin boards on different shit. People who like mechanical watches complain they get WAS (watch acquisition syndrome). Guitarists get GAS (gear acquisition syndrome), and so on. Same with traveling. They’re constantly looking for the latest and greatest, and they’re never happy.

Surprisingly, you can also go nuts saving money. People run from Marshalls to TJs to Home Goods every week hoping to find their special bargain. Not happy.

On the other side of the equation, sticking with a shit job—just to earn enough money that’ll allow you to give up on work altogether and live a frugal existence for the rest of your life—ain’t gonna make you happy either. Better to keep looking for work that is rewarding, where you feel like a real contributor, and where your skills and contributions are recognized by others. Doing work that you know benefits others is amazing. Don’t settle for less, just to become FI. That’s not life either.

[bthewalls]

What I’m hearing is if there’s no balance or common sense, being financially ‘happy’ might be hard to achieve.

Flip side of that is once a person is balanced, financial freedom could be alot easier to achieve, but without the clutching or desperation…..money wont remove chronic anxiety or fear

[Rockies]

What I am getting from this discussion is that peak happiness exists when you live a very frugal life but also own a private jet.

Also, can someone link to a calculator for the Merton framework? Or post the formula?

[Geppetto]

Definitional problems abound in this discussion.

Is happiness something like the sum of satiety, security, comfort, and ease? Because those are all pretty linearly correlated to money, at least until a certain stratospheric wealth is attained where more money can't buy more. These are all hedonic values.

An opposite view is that happiness is found in detachment from hedonic pursuits. Indifference to satiety, security, comfort and ease: that's happiness, according to a couple billion people at least in theory.

Then there's the grand adventure view. The stakes of life are on a different order from either satiety or indifference to satiety. Life is not ultimately a mere accumulation of moments consisting of positive or negative experiences, with an abrupt and meaningless endpoint. Rather, there's an ultimate good to be pursued in partial and mortal ways, tending towards spiritual wholeness and immortality. To spend one's life seeking that good and helping one's friends and family to seek it is happiness - whatever hardships come.

Having known people who are/were guided by this last view, I'm partial to it. The folks I'm speaking of, their material circumstances are pretty peripheral to their mentality. Their view of money (whether they have lots or little) is that it's a tool to be used for other ends, and a hazard insofar as it becomes an idol and a distraction. Most tend to be skilled at managing money, I suppose since they govern it and it doesn't govern them.

[bthewalls]

Folks were getting deep, but I like it.

I think pressure in USA is greater. Retirement sum needs to be bigger to include all expenses, kid’s education, property costs, etc. I’ve read up to 5m needed for high quality retirement.

For example, in Northern Ireland medical is entirely free, education is cheaper plus grants/loans available for kids education, secondary education entirely free……however society is a mess

[Psychstache]

For purporting to be about happiness, the article did not discuss it at all. Rather, it seemed to be more about the phenomenon of risk aversion.

If you want to learn about the research of happiness, there is a lot of good material out there, and surprisingly little of the answers have to do with money. For example, see: https://www.harvard.edu/in-focus/happiness/. The famous 80-year old Harvard study found that "Close relationships, more than money or fame, are what keep people happy throughout their lives." Maintaining good health is also important.

Another way to view the source of happiness is through a formula: 50% is genetic, 25% is circumstantial, and 25% is daily habits.

I think that pursuing FIRE is not an end in itself, but rather, a means to stop worrying about money and focus on things that make us truly happy.

+1. It is much easier to develop and maintain close relationships and take care of your health if you don't have to work 60+ hours per week.

[vand]

I'm not going to read the article because of the paywall, but I've listened to a couple of podcasts recently about it.

Just on an intuitive level for myself, I disagree with the old oft-cited idea that happiness peaks at $75k/year or whatever for inflation-adjusted dollars.

There are a lot of things that more money can really improve. The key is to find the right things, which requires a lot of self-awareness and ignoring the larger culture.

Private flying was mentioned--something I'll never have enough money for, but which I can imagine would be amazing. Just upgraded flights would be incredibly helpful for us, but we'll never afford those either. Unfortunately we have to fly at least 13 hours in order to see family, which we have identified as something that brings us joy. The flights are pretty miserable, which means we don't go as often as we'd like...flying is so bad for the environment that also deters us, but that's another story. 

Giving money away in interesting ways is also enormously joyful. Having enough to be generous without a second thought has been one of the great joys of the last few years for us, as our income has increased.

Blowing money on consumer-sucka stuff is clearly not a way to increase joy, at least for me, but there are loads of other amazing ways to spend money in order to increase joy if one is creative.

I am of the opinion that unearned weath doesn't bring any lasting happiness, so a lottery win or inheritance, while it may make enrich you and even propel you to full FI, won't make you any happier in the long rurn, whereas if you put in the work in yourself, work your way up to whatever the cited plateau level is and keep going then there is a large degree of life satisfaction, positive feedback and continual self development there that doesn't just stop at that level.

And I'd also question if these surveys are even measuring the right thing. Happiness is always fleeting. Satisfaction and fullfillment OTOH stays, if not indefinitely, then at least for much long timeframes, and is what I believe most people are really seeking.

So year, it's bollocks. 

[2sk22]

My happiest moments are times spent with family and friends. Apart from that, my happiness comes in diverse ways:
- The purely internal satisfaction from building or fixing something: could be software, a machine, a model
- Recognition from others
- Upsight: A term coined by Neal Stephenson described as "a sudden unusually unlooked-for moment of clear understanding". In other words, the moment when things click into place in your mind. Lets say, something initially looks appears to be chaotic. That moment when I understand the underlying pattern causing it is pure bliss.

[41_swish]

For a long time, I have always thought that money can't buy happiness, but it can make your life not suck.

When I got my first job after university, I went from being dirt broke to living pretty comfortably. This did improve my quality of life and make me happier, but after that, the money really didn't mean much.

My happiness now comes from building lasting memories, experiences, and having a sense of community through different activities I go to.

[SeattleCPA]

What I am getting from this discussion is that peak happiness exists when you live a very frugal life but also own a private jet.

Also, can someone link to a calculator for the Merton framework? Or post the formula?

The Merton framework really focuses on the risk vs return tradeoff and is an example of why "probably more" isn't automatically better. That qualification made, sorry, I started this thread and should have seen and responded to your question earlier.

I did a little JavaScript calculator to calculate Merton shares here: https://evergreensmallbusiness.com/merton-share-estimator/

And this blog post of mine discusses how to use the Merton framework to estimate a super-safe withdrawal rate: https://evergreensmallbusiness.com/super-safe-withdrawal-rate/

The results are, I think, too conservative but if you peek at the chart below, you can see Merton's insight in picture:

[dcheesi]

Hmm, missed this thread the first time around.

FWIW, I found what seems to be a dupe of the original article on another (random) site, which at least for me didn't throw up a paywall:

https://elmwealth.com/how-much-happiness-does-money-buy/