How To Lead a Rich Life

Money Can Buy Happiness (Sort of)

The Price: $1.5 Million

Let's put to rest one of the most trite and nagging questions in life: Can money buy happiness? In private, most of us would probably answer "yes." In public, the answer is usually an emphatic "no." But wait: New evidence from the academic field of "happiness economics" provides a third answer -- call it "yes, but" -- and reveals a collection of insights about the tangled relationship between wealth and well-being.

In the field of economics, it used to be that the pursuit of happiness was left up to the free market. A fundamental tenet was that the way to achieve well-being (or "utility") is through economic growth. In the case of individuals, raise your income. In the case of nations, pump up the GDP (to allow citizens to aquire more utility). The first important (and largely ignored) challenge to those assumptions was a seminal 1974 study of the relationship between economic growth and well-being by USC economic historian Richard Easterlin. Easterlin found that above a very low level, economic growth does not seem to improve welfare. His explanation, known as the "Easterlin paradox," was that, because people judge themselves in relation to others, any real jump in income makes little difference in how they feel about themselves. Having more isn't enough -- unless someone else has less. Even gains in relative income make little difference: We just compare ourselves to a higher standard. The more we have, the more we want. And the less happy we become.

Andrew Oswald, a professor of economics at the University of Warwick in England and one of the pioneers of the newly rekindled field of happiness economics, has been studying the interplay of money and happiness for the past decade. "When you carefully control for other things," he concludes, "more money actually does make people a bit happier."

But, he cautions, most of the effects are temporary. "The curse of humanity is that people feel compelled to look over their shoulders," says Oswald. "Happiness and self-esteem depend on rank and relative income. We are consumed by relativism. We can't help but form comparison groups in our minds. Your hair isn't good enough. If your neighbor drives up in a new Lexus, and you're still driving the Toyota that you were perfectly satisfied with yesterday, you start to become dissatisfied."

There is, however, a sum of money that seems to trump our tendency to turn every achievement into a burden. That number is $1.5 million. Oswald's studies of the effects of windfalls on lottery winners and inheritors indicate that a $1.5 million cash infusion bumped happiness levels all the way from "fed up" to "very happy" -- the psychological equivalent of accelerating from zero to 60 in a few nanoseconds.

The flip side of this good news (we can buy happiness at some price) is the bad news: The lack of money (or the sense of success) may do real harm. Nobody wants to be a nobody. We're programmed to get somewhere, to make something of ourselves -- or at least to look like it. "Lack of success is literally a life sentence," says Oswald.

Scores of epidemiological studies and Oswald's own research underscore the tight link between status and health. Seniority at work is a reliable predictor of lifespan after retirement. Status has an even bigger effect on lifespan than smoking. A pair of economists documented this phenomenon in a famous study of Academy Award winners. Oscar winners live at least three years longer than Oscar nominees. The gold statue, it seems, is literally a life pass. (As if Tom Hanks and Julia Roberts need another perk!)

If your life's in turnaround, Oswald has a more modest approach to dialing up well-being. "Instead of keeping up with the Joneses," he jokes, "we'd all be much better off if we just compared ourselves to our grandmothers. Then we're looking at real gains."

As it turns out, by the time we get to be our grandmother's age, we'll be happier anyway. That's because happiness over any given lifetime looks like a big U-curve. "You start out thinking that you're going to conquer the world," says Oswald. "Then you discover that it's tough out there and become dissatisfied. Happiness levels tend to bottom out around 30. Eventually, after 5 or 10 years, you come to terms with yourself. You learn to control your aspirations. After you've done that, it's easier to get steadily happier again."