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Graham Westmacott CFA

Portfolio Manager

Susan Daley CFA

Associate Portfolio Manager
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The Economics of Happiness

December 17, 2015 - 0 comments

Santa may bring many gifts but sustained happiness isn’t one of them, according to researchers.

What is the relationship between wealth and happiness? A 2012 study suggested that there is a correlation between wealth and happiness but not whether wealth causes happiness or happiness causes wealth.

More recent research has suggested that human happiness boosts performance at work and hence their wealth. Conversely depressed workers are less productive and earn less. To examine whether an increase in wealth implied an increase in happiness economists went to villages in rural Kenya to look for answers.

Rural Kenya was chosen for the study because, compared to western societies, it is less costly to run trials in which monetary awards were given out at random amongst households. The average award was enough to double the wealth of a village household. The happiness of the villagers were assessed by a variety of methods both before and after the monetary awards.

Villagers who did not receive anything became less happy as their neighbour’s well-being increased.  In fact, the decline in satisfaction prompted by those who did not get payouts was bigger than the increase in satisfaction from those who received awards. At the village level, adding wealth did not increase total happiness. For both groups, recipients and non-recipients, the impact was temporary and within a year the happiness of both groups returned to former levels. The conclusion from these multiple studies is that happiness leads to increased wealth through increased productivity but increasing wealth only provides a temporary increase in happiness for the direct recipients which can be more than offset by the negative impact on non-recipients.

What were non-recipients in the Kenya study unhappy about? As it turned out, widening inequality was not the cause of non-recipient’s discontent. Inequality could arise even if the average wealth in the village stayed the same. The dissatisfaction arose because villagers compared themselves to the average wealth in the village. Other studies confirm the idea that people’s wealth comparisons are skewed: we tend to compare our wealth with those wealthier than us and ignore those less wealthy. When our wealth improves we keep moving our focus to those who remain better off and quickly adapt to our new level of wealth.

As reported in The Economist magazine, this conclusion was offered as the engine of capitalism: our never ending quest to keep up with those who have above average wealth. The downside, of course, is that we seem trapped in an unfulfillable quest.  Economics became known as the dismal science because it was thought to predict that the population would always grow faster than food, leading to poverty and misery. Is it any less dismal to offer perpetual striving for an unattainable goal?

Is happiness really just a series of happy events, such as always getting the latest iPhone, as the economic researchers suggest? Lord Glenconner who died in 2010, after dissipating his fortune in lavish entertainments, was reported to have said at the end of his life, “Nothing much has happened to me…it’s like a party –gone the day after”. This doesn’t seem to be the voice of a happy man despite, presumably, having many happy moments afforded by his wealth.

Robert & Edward Skidelsky ruminated on the economics of happiness in their book “How Much Is Enough?”, and suggested how to achieve a more persistent happiness, “our proper goal… is not just to be happy but to have reason to be happy. To have the good things in life ̶ health, respect, friendship, and leisure is to have reason to be happy. To be happy without these things is to be in the grip of a delusion: the delusion that life is going well, when in fact it is not.”

As we head for the Festive Season, we embrace the Sidelsky’s perspective and wish everyone the truly good things in life and a reason to be happy.

By: Graham Westmacott with 0 comments.
Filed under: Happiness, Wealth
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