Link Between Money, Happiness, and Personal Well-Being

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Psychology and Personal Finance
 
Money and Happiness
 
Overview
 
What makes us happy?
 
Do we really know what makes us happy?
 
How to be happier
 
Money and Happiness
 
2
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What Makes Us Happy?
 
Do These Things Make Us Happy?
4
 
Wealth?
5
Income and Happiness
Sources: Layard (2005); Easterlin (2001)  
Do These Things Make Us Happy?
6
Wealth?
 
 
Marriage?
7
Marriage and Happiness
Sources: Kahneman et al (2004)  
Do These Things Make Us Happy?
8
Wealth?
Marriage?
 
 
Youth?
 
Youth and Happiness
 
9
 
Sources: Inglehart (1990)
Do These Things Make Us Happy?
10
Wealth?
Marriage?
Youth?
 
 
Education?
 
Education and Happiness
 
 
 
 
There is no effect on happiness across countries
and only a small effect within countries
 
11
 
Source: Helliwell (2003)
Do These Things Make Us Happy?
12
Wealth?
Marriage?
Youth?
 
Looks?
Education?
 
 
Looks and Happiness
 
Looks don’t make us happy after taking away the
hair, makeup, jewelry and nice clothing
 
13
 
Source: Diener, et al (1995)
Do These Things Make Us Happy?
14
Wealth?
Marriage?
Youth?
Education?
Looks?
 
 
Gender?
 
Gender and Happiness
 
 
Men are more prone to alcoholism, while
women to depression
 
15
 
Source: Layard (2005)
Do These Things Make Us Happy?
16
Wealth?
Marriage?
Youth?
Looks?
Gender?
 
 
Religion?
Education?
 
Religion and Happiness
 
 
Religion does make us happy…but why?
 
Is it the “God” part which makes us happy, or
the “community” part?
 
17
 
Sources: Seligman (2001); Putnam (2000); Layard (2005)
Do These Things Make Us Happy?
18
Wealth?
Marriage?
Youth?
Looks?
Religion?
 
 
Family?
Education?
Gender?
 
Family and Happiness
 
 
 
 
People with the highest levels of happiness have
strong social relationships
 
19
 
Sources: Seligman (2001); Putnam (2000); Layard (2005)
Do These Things Make Us Happy?
20
Wealth?
Marriage?
Youth?
Looks?
Religion?
Family?
 
Education?
Gender?
 
What We’ve Learned (So Far)
 
What makes us happy?
 
21
undefined
 
Do We Really Know What Makes
Us Happy?
 
 
Are These People Happy?
 
23
 
What About Now?
 
24
 
 
Long Term vs. Short Term
Happiness
 
“In the moment” and “Morning after” have
very different levels of happiness
 
Momentary happiness and life satisfaction
could be dramatically different too
 
Obese people love to eat the food they
do…but are not happy with their overall life
 
25
 
Sources: Kahneman et al (2004), Kahneman et al (2006)
 
The Focusing Illusion
 
We fail to recognize that people do not
continuously think about their circumstances,
whether positive or negative
As a result, we tend to exaggerate the effect of
various circumstances on well-being
Paraplegics are not as miserable as you think
and lottery winners are not as happy as you
think
 
26
 
Sources: Kahneman et al (2004); Kahneman et al (2006)
 
The Focusing Illusion
 
27
 
Is It Relative Income That Matters?
 
28
 
What We’ve Learned (So Far)
 
What makes us happy?
Do we really know what makes us happy?
Life satisfaction vs. experienced happiness
The focusing illusion
Relative income
 
29
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How To Be Happier
 
 
Can We Increase Our Happiness?
 
 The Nature View:
Happiness is like height: We are born with it
Twins: 50% Genetic,  8% Circumstantial (income,
education, etc.)
The Nurture View:
Although people are genetically different, we can
consistently affect our happiness levels
42% is a lot left unexplained – can we do
something about it?
 
31
 
 
Source: Lykken (1996)
32
Trick # 1 – How to Spend Your Time
Source: Kahneman et al (2004)
 
Trick #2 – Positive Psychology
 
 
Positive psychology identifies 3 distinct routes to
“happiness”
Positive emotion and pleasure
Engagement
Meaning
 
33
 
 
Sources: Seligman (2002); Peterson et al (2005)
 
Specific Tricks That Work
 
Gratitude visit
Write and deliver a letter of gratitude to someone
who had been kind but never properly thanked
Three good things in life
Write down 3 things that went well every night for
1 week and provide a causal explanation for each
good thing
Using signature strengths in a new way
 
Use 1 of top 5 “signature” strengths in a new and
different way daily for 1 week
 
34
 
 
Source: Seligman et al (2005)
 
What We’ve Learned (So Far)
 
What makes us happy?
Do we know what makes us happy?
How to be happier
How to spend your time
Positive psychology
 
35
undefined
 
Money And Happiness
 
 
Economist Advice
 
More is Better!
 
37
 
Economics vs. Hedonomics
 
One analogy
A person that loves wooden blocks becomes
bored playing with the ones he has had for a while
 
How can we make him happier?
A solution from Economics: Acquire more blocks!
A solution from Hedonomics: Learn to combine
the blocks in new and more satisfying ways!
 
38
 
 
Source: Hsee et al (2007)
 
Examples of Hedonomics at Work
 
Changing reference points can change the
hedonic experience:
Don’t compare yourself to your MBA
classmates…but your high school classmates
Reference point can be real or counterfactual:
Are Olympic bronze medalists happier than silver
medalists?
 
39
 
 
Source: Medvec et al (1995)
 
Hedonic Arbitrage
 
    Increasing investors / consumers’ hedonic
experience without necessarily increasing their
income, wealth, or spending
 
40
 
41
 
BMW X3 and
Free Gas for 3 Years
 
BMW X5
 
$46,200
 
$46,200
 
41
 
Trick # 1 – Consider Opportunity
Costs
 
Trick # 2 – Create Multiple
Accounts
 
Nest-egg 
account managed by professionals
and kept largely out of sight
 
Have fun 
account managed by investor with
low transactions costs and lots of feedback
(although perhaps with limits on leverage and
non-zero liability investments)
 
42
 
Potential Benefits of These
Accounts
 
 
Investors get to have fun (and possibly make
some money)
 
At the same time, they are protected from the
downside of the natural desire to meddle
 
43
 
What We’ve Learned
 
 
What makes us happy?
 
Do we really know what
makes us happy?
Life satisfaction vs.
experienced happiness
The focusing illusion
Relative income
 
How to be happier
How to spend your time
Positive psychology
 
Money and happiness
Hedonomics
Hedonic Arbitrage
 
44
 
Class Exercise
 
 
 
Create a business model to make
money by promoting happiness
 
45
 
Class Discussion
 
 
 
Should the government consider
implementing policy to promote
happiness as well as wealth?
 
46
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Delve into the intricate relationship between money, happiness, and personal fulfillment through a series of thought-provoking insights. Discover the impact of wealth, marriage, youth, education, and looks on one's overall happiness and well-being. Uncover the nuances of what truly contributes to a fulfilling life beyond material possessions.

  • Money
  • Happiness
  • Personal Finance
  • Well-Being
  • Relationships

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  1. Psychology and Personal Finance Money and Happiness

  2. Overview What makes us happy? Do we really know what makes us happy? How to be happier Money and Happiness 2

  3. What Makes Us Happy?

  4. Do These Things Make Us Happy? Wealth? 4

  5. Income and Happiness Real Income Per Head Percentage Very Happy 300 100% 250 Percentage Very Happy 75% Real Income (1945=100) 200 150 50% 100 25% 50 0 0% 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Sources: Layard (2005); Easterlin (2001) 5

  6. Do These Things Make Us Happy? Wealth? Marriage? 6

  7. Marriage and Happiness 100% 80% Life Satisfaction 60% 40% 20% 0% -4 -3 -2 -1 0 1 2 3 4 5+ Years Relative to Marriage Sources: Kahneman et al (2004) 7

  8. Do These Things Make Us Happy? Youth? Wealth? Marriage? 8

  9. Youth and Happiness Sources: Inglehart (1990) 9

  10. Do These Things Make Us Happy? Youth? Wealth? Marriage? Education? 10

  11. Education and Happiness There is no effect on happiness across countries and only a small effect within countries Source: Helliwell (2003) 11

  12. Do These Things Make Us Happy? Youth? Education? Wealth? Marriage? Looks? 12

  13. Looks and Happiness Looks don t make us happy after taking away the hair, makeup, jewelry and nice clothing Source: Diener, et al (1995) 13

  14. Do These Things Make Us Happy? Youth? Education? Wealth? Marriage? Looks? Gender? 14

  15. Gender and Happiness Men are more prone to alcoholism, while women to depression Source: Layard (2005) 15

  16. Do These Things Make Us Happy? Youth? Education? Wealth? Marriage? Looks? Gender? Religion? 16

  17. Religion and Happiness Religion does make us happy but why? Is it the God part which makes us happy, or the community part? Sources: Seligman (2001); Putnam (2000); Layard (2005) 17

  18. Do These Things Make Us Happy? Youth? Education? Wealth? Marriage? Looks? Religion? Gender? Family? 18

  19. Family and Happiness People with the highest levels of happiness have strong social relationships Sources: Seligman (2001); Putnam (2000); Layard (2005) 19

  20. Do These Things Make Us Happy? Youth? Education? Wealth? Marriage? Looks? Religion? Gender? Family? 20

  21. What Weve Learned (So Far) What makes us happy? 21

  22. Do We Really Know What Makes Us Happy?

  23. Are These People Happy? 23

  24. What About Now? 24

  25. Long Term vs. Short Term Happiness In the moment and Morning after have very different levels of happiness Momentary happiness and life satisfaction could be dramatically different too Obese people love to eat the food they do but are not happy with their overall life Sources: Kahneman et al (2004), Kahneman et al (2006) 25

  26. The Focusing Illusion We fail to recognize that people do not continuously think about their circumstances, whether positive or negative As a result, we tend to exaggerate the effect of various circumstances on well-being Paraplegics are not as miserable as you think and lottery winners are not as happy as you think Sources: Kahneman et al (2004); Kahneman et al (2006) 26

  27. The Focusing Illusion Would you be happier than these people if you won the lottery? 27

  28. Is It Relative Income That Matters? 28

  29. What Weve Learned (So Far) What makes us happy? Do we really know what makes us happy? Life satisfaction vs. experienced happiness The focusing illusion Relative income 29

  30. How To Be Happier

  31. Can We Increase Our Happiness? The Nature View: Happiness is like height: We are born with it Twins: 50% Genetic, 8% Circumstantial (income, education, etc.) The Nurture View: Although people are genetically different, we can consistently affect our happiness levels 42% is a lot left unexplained can we do something about it? Source: Lykken (1996) 31

  32. Trick # 1 How to Spend Your Time Percentage of Time Unhappy (U-index) 27.8% 19.4% 14.9% 11.4% 10.9% 11.0% Passive leisure Engaged leisure Eating Talking Home Work and commute compulsory Source: Kahneman et al (2004) 32

  33. Trick #2 Positive Psychology Positive psychology identifies 3 distinct routes to happiness Positive emotion and pleasure Engagement Meaning Sources: Seligman (2002); Peterson et al (2005) 33

  34. Specific Tricks That Work Gratitude visit Write and deliver a letter of gratitude to someone who had been kind but never properly thanked Three good things in life Write down 3 things that went well every night for 1 week and provide a causal explanation for each good thing Using signature strengths in a new way Use 1 of top 5 signature strengths in a new and different way daily for 1 week Source: Seligman et al (2005) 34

  35. What Weve Learned (So Far) What makes us happy? Do we know what makes us happy? How to be happier How to spend your time Positive psychology 35

  36. Money And Happiness

  37. Economist Advice More is Better! 37

  38. Economics vs. Hedonomics One analogy A person that loves wooden blocks becomes bored playing with the ones he has had for a while How can we make him happier? A solution from Economics: Acquire more blocks! A solution from Hedonomics: Learn to combine the blocks in new and more satisfying ways! Source: Hsee et al (2007) 38

  39. Examples of Hedonomics at Work Changing reference points can change the hedonic experience: Don t compare yourself to your MBA classmates but your high school classmates Reference point can be real or counterfactual: Are Olympic bronze medalists happier than silver medalists? Source: Medvec et al (1995) 39

  40. Hedonic Arbitrage Increasing investors / consumers hedonic experience without necessarily increasing their income, wealth, or spending 40

  41. Trick # 1 Consider Opportunity Costs BMW X3 and Free Gas for 3 Years BMW X5 $46,200 $46,200 41 41

  42. Trick # 2 Create Multiple Accounts Nest-egg account managed by professionals and kept largely out of sight Have fun account managed by investor with low transactions costs and lots of feedback (although perhaps with limits on leverage and non-zero liability investments) 42

  43. Potential Benefits of These Accounts Investors get to have fun (and possibly make some money) At the same time, they are protected from the downside of the natural desire to meddle 43

  44. What Weve Learned What makes us happy? How to be happier How to spend your time Positive psychology Do we really know what makes us happy? Life satisfaction vs. experienced happiness The focusing illusion Relative income Money and happiness Hedonomics Hedonic Arbitrage 44

  45. Class Exercise Create a business model to make money by promoting happiness 45

  46. Class Discussion Should the government consider implementing policy to promote happiness as well as wealth? 46

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