August 17, 2005
Happiness Comes From Relative Comparisons Of Wealth

While level of physical healthiness is the biggest determinant of happiness, comparison of financial success with others of the same age group is the second largest source of happiness and unhappiness.

PHILADELPHIA, PA--Financially richer people tend to be happier than poorer people, according to sociological researcher Glenn Firebaugh, Pennsylvania State University, and graduate student Laura Tach, Harvard University. Their research is focused on whether the income effect on happiness results largely from the things money can buy (absolute income effect) or from comparing one's income to the income of others (relative income effect). They present their research in a session paper, titled "Relative Income and Happiness: Are Americans on a Hedonic Treadmill?," at the American Sociological Association Centennial Annual Meeting on August 14.

Firebaugh argues that, in evaluating their own incomes, individuals compare themselves to their peers of the same age. Therefore a person's reported level of happiness depends on how his or her income compares to others in the same age group. Using comparison groups on the basis of age, the researchers find evidence of both relative and absolute effects, but relative income is more important than absolute income in determining the happiness of individuals in the United States. This may result in a self-indulgent treadmill, because incomes in the United States rise over most of the adult lifespan.

"If income effects are entirely relative, then continued income growth in rich countries today is irrelevant to how happy people are on the whole," says Firebaugh. "Rather than promoting overall happiness, continued income growth could promote an ongoing consumption race where individuals consume more and more just to maintain a constant level of happiness."

Firebaugh tested what he refers to as the hedonic treadmill hypothesis, which uses a comparison of age-based cohorts. The hedonic treadmill requires a specific type of relative income effect--one where "keeping up with the Joneses" means continually increasing one's own income, because we can be sure that the Joneses are increasing theirs.

This suggests a reason why some find socialism attractive: People want to be freed from the competitive need to keep up with others. Socialists want to eliminate the ability to get ahead so that they no longer have to worry about the need to keep up others in order to preserve their happiness. Therefore the lure of socialist policies stems from innate genetically determined features of how the mind works.

The researchers' measured the age, total family income, and general happiness of 20- to 64-year-olds using analysis from the 1972-2002 General Social Survey. They controlled for health, education, effects of getting older, race, and marital status. Happiness was measured using a self-report response of "very happy," "pretty happy," or "not too happy."

While income is important in determining happiness, Firebaugh's data found that physical health was the best single predictor of happiness, followed by income, education, and marital status. The researchers found a relative income effect--the richer you are relative to your age peers, the happier you will tend to be.

Aside: This is yet another argument for the development of Strategies for Engineered Negligible Senescence or SENS. SENS therapies will rejuvenate the body and make everyone healthier. Since healthiness is the most powerful determinant of happiness rejuvenation therapy will greatly increase happiness for entire populations.

"We find with and without controls for age, physical health, education, and other correlates of happiness," said Firebaugh, "that the higher the income of others in one's age group, the lower one's happiness. Families whose income earners are in jobs with flat income trajectories are likely to become less happy over time. Thus the relative income effect observed here implies adverse effects for some individuals over the working years of their life cycles."

On the other hand, the longer people live the more they will feel unhappy due to losing out to more successful people their same age. The range of incomes and accumulated assets will get wider with passing years due to differing levels of ability, motivation, and luck. However, if everyone walks around in youthful bodies comparison between oneself and people of one's own age group will become more difficult. How to tell who is your age or 50 years older or younger than you?

But comparison of relative wealth as a source of unhappiness will be solved by advances in neuroscience. People will use drugs, gene therapies, and cell therapies to reprogram their circuits for determining their level of happiness. For example, I predict that people setting out to achieve some goal (e.g. getting an advanced degree or starting a business or leaning to play a musical instrument) will get their own brains reprogrammed to cause them to get more of their sense of happiness from how well they are progressing toward that goal and less from comparison with other people.

One of the problems posed by cheap worldwide communications technologies is that they increase the pool of people to which people compare each other. Someone in Pakistan or Yemen or South Africa can compare their material possessions to those in Britain or America or Taiwan and find more people who are far better off than them. Therefore satellite TV and the internet are probably sources of increased unhappiness (and likely resentment) among the poorer folks who have access to such technologies. Super poor people in places like Bangladesh or Niger probably feel less unhappiness about relative levels of wealth than moderately poor people in places like Egypt or Indonesia.

Update: Another point: If rich peope were to hide their wealth by living in places that are either obscure (plant trees and bushes and live in small remote valleys in rural locales or perhaps on private islands) or in homes that are outwardly modest looking then the happiness of an overall population would be raised. Also, if wealth gets concentrated into a small number of countries and the poorer folks are kept from emigrating to those countries then again relative differences in levels of wealth would be less obvious and poorer folks would probably feel happier.

Share |      Randall Parker, 2005 August 17 03:22 PM  Brain Economics


Comments
Brett Bellmore said at August 17, 2005 3:29 PM:

I suppose that's a problem if you're in Pakistan or Yemen, but it works out pretty good if you live in a first world country, and chat a lot with folks in the third world.

AA2 said at August 17, 2005 5:02 PM:

This is why socialism is so attractive to many people. Most would rather be poor but average for their society, then wealthy yet below average in their society.

Invisible Scientist said at August 17, 2005 5:32 PM:

Here are some statistics: In 1929, the top 1 % richest families in the United States owned close to 45 % of the total financial wealth. By 1980,
the top 1 % owned only 20 % of the wealth, because the Great Gepression which caused asset deflation and bankruptcies, and the higher taxes on the rich that were imposed after the Depression and WW II, followed by the inflationary 1970s, redistributed the relative wealth of the rich in the country. However, between 1980 and 2000, by March 2000, the top 1 % richest families came close to owning 50 % of the total wealth. Despite the bear market, most of the the economic growth is accumulating in the top 10 % (in March 2000, the top 10 % owned 90 % of the wealth in the US.) I am absolutely sure that by 2020, the top 5 % will own 95 % of the wealth.

In any case, Jealousy is the most powerful of all emotions; hatred doesn't even come close to the power of jealousy.

As if this were not enough, suppose that in the future, the members of a certain elite get the secret of immortality or near-immortality by means of very expensive medical treatments. Can you imagine how much more jealousy this will engender?

apocalypse said at August 17, 2005 7:02 PM:

I've to say that in a sense I agree, it's difficult to be satisfied when there's still vastly more room left for you to develop, and those who've gone beyond you in any field are just a very sharply defined beacon showing you: "that no matter how far you think you've gotten, you're really just at the beginning.".

me said at August 17, 2005 7:52 PM:

While I agree with the study, its important to remember that as people get weathier cost of living and housing goes up, so perhaps the reason rich people are happy is simply just because they don't live in slums. On a related note old movies and video games were just as entertaining in their day and age as new ones are today, but now the old stuff is less entertaining for most people (though as ted turner has shown, not as much as was thought).

Lei said at August 18, 2005 1:51 AM:

Randall, it always amuses me when you say, "I predict...." Can I borrow your crystal ball sometime?

Your suggestiong that we keep wealth "hidden" or out of sight is interesting. But historically, having things is synonymous with having power. Wouldn't we mistrust those in power who seem to be doing as poorly as we are?

In any case, humans always like to compare themselves to others. However small the difference will still be enough for us to feel inadequate. And, besides, it's impossible to control for everything symbol of affluence. If you take away everyone's belongings, I'm sure we'd still be measuring wealth by the number of fat rolls around our middle or the number of chins on the fat businessman's face.

John Brothers said at August 18, 2005 7:29 AM:

Invisible Scientist.

Here are some URLs that refute (or at least diminish) both of your key claims. I would like to see yours so I can understand why they are so different. I do notice that they don't seem to go past 1998, whereas your data would appear to be more recent.

First:
http://www.osjspm.org/101_wealth.htm#3

Another:
http://answers.google.com/answers/threadview?id=2050

Jim said at August 18, 2005 7:52 AM:

most 'old money' people I've ever met were surprisingly understated and took care not to openly flaunt their wealth, which tends to resonate with RP's point about wealthy keeping their assest hidden.
'new money' people are often the opposite though.
just anectdotal observations of mine.

Randall Parker said at August 18, 2005 8:54 AM:

Lei,

Most upper class people in America are not in politics and do not exercise political power. They just have really nice homes, second homes for vacations, fancy cars, jewelry, lots of investments, and so on.

No, people do not distrust rich people who live modestly. Such people (if their wealth is known) are considered misers and admired for their frugality for the most part.

But if more people lived modestly the larger public would not even know in most cases how much money they had. I'm sure some of my neighbors are worth a few times more than other neighors and I can't tell which is which. Maybe the person driving the old car is worth more because they save the money they don't spend on new cars for example.

Jody said at August 18, 2005 10:18 AM:

Here's another SENS happiness benefit in addition to your hidden age parallel to hidden wealth.

I think having the knowledge that you've got centuries/millenia of life left to go will dull people's sense of a "wasted youth." While you wouldn't actually live forever, you couldn't approximately predict when you would die (raise your hand if you expect to live past 80 without tremendous advancements in technology), so from an economic analysis viewpoint, life would have an infinite horizon. Then what's 20 years when you think you have infinity?

Along those same lines, an infinite horizon should also blunt the age comparisons as there's always a chance to catch up and be the one who "wins". Suppose person x had a better 80 year economic run than I did. Oh well, let's just play best 2 out of 3. 3 out of 5. 4 out of 7.... There will always be the possibility that I could catch up and presumably I won't feel as if I've "lost" and resent the ones currenty in the "lead."

Invisible Scientist said at August 18, 2005 12:48 PM:

John Brothers:
In the web sites you mentioned, they wrote that in 1998
the wealth distribution figures were:

% of US Population % of Wealth Owned
==========================================================
Top 1% 38.1%
Top 96-99% 21.3%
Top 90-95% 11.5%
Top 80-89% 12.5%
Top 60-79% 11.9%
General 40-59% 4.5%
Bottom 40% 0.2%

and that:

Household Net Worth, 1998
Population Threshold Average Net Worth
Top 1% $3,352,100 $10,204,000
Next 4% $1,441,000
Next 5% $475,600 $623,500
Next 10% $257,700 $344,900
Fourth 20% $161,300
Middle 20% $61,000
Bottom 40% (Negative) $1,100
---------------------------------------------------
As far as 1998 is concerned,I agree with these fugures, my historical data does agree with what you are saying up to 1998, but between 1998 and 2000, 3 economically prosperous years added another 15 % or 20 % to the wealth of the upper 10 % BECAUSE of the fact that the lower classes did not benefit from the economic growth in terms of increasing their net worth. Please note that during the last two years, the government deficit spending has been at least $400 billion per year (close to 4 % of the GDP)please see the following chart at:
http://bullandbearwise.com/GovDefChart.asp
And note that ALL the government deficit spending, actually ends up going to the bank accounts of the upper class,because in the final nalysis, when government gives money to the lower class by means of deficit spending (for simplicity in this discusssion, lower class is defined to be the below average income group, which is the majority, since median income is below average income), then the lower class merely breaks even because they have no choice but to spend all that new fresh money, and this money goes to the upper class. This is the main reason the net worth of the top 1 % rich in 1980 which was only 20 % of the total wealth in the USA, became nearly double in 1998 (38 % in your data), because all the cumulative government deficit spending between 1980 and 1998 went to the upper class. Note that Standar and Poor 500 index is 20 % above the 1998 bottom, and more importantly, the Real Estate boom between 2000 and 2005 mostly benefited the upper 10 % of the population, since they invested better, and profited better,and the lower class people often extracted money from their equity only to spend it nefficiently (they did not add much value to their house with the second mortgages.)The long term data for the wealth distribution history, was from Ned Davis and Elliott Wave newsletters.

AMac said at August 19, 2005 8:43 AM:

The premise of the post (importance of relative wealth perceived to be enjoyed by relevant comparison group) rings true to me, anecdotally (FWIW) from spending some time decades ago in Central America, and from working in a major medical center surrounded by low-income urban neighborhoods.

Equally, it's a possible psychological explanation for why so many relatively wealthy Americans don't object to the ongoing influx of poor illegal immigrants. Seeing people who are clearly economically worse-off every day makes 'us' happier. Depressing thought.

Tom said at August 19, 2005 4:07 PM:

I think you're looking at socialism backwards. The goal isn't to make rich people poorer, it's to make the poor (and to a lesser extent, the middle class) richer. This may result in making rich people poorer, and may even drive down the average wealth. But don't confuse the effects with the goal.

And I don't think that socialism *aims* to lessen the personal drive to do well. It's just an unfortunate side effect.

Bob Badour said at August 20, 2005 6:44 PM:

Tom, I disagree. The goal, the method and the means of socialism is to keep the able and deserving from advancing over the unable and undeserving in the mistaken belief that fairness requires equality of outcome instead of equality of opportunity. Socialists will tell you that helping the little guy motivates them, but socialists are notorious liars.

Hence the evil policies socialism engenders such as forcibly preventing the intelligent and able from spending their own money on their own healthcare or from deciding how to spend their own money on their own healthcare.

Randall, I suggest you nix the whole "hide affluent homes among the trees" suggestion. Unless accompanied with ostentatious displays of physical barriers and various security systems, the trees will just provide cover to the home invaders and burglars while they go about their business.

Patrick said at August 22, 2005 1:16 AM:

A couple of points:
1. Surely media distortion plays a part. A very warped view of the wealth of others comes from media, because for every blue collar worker on TV there must be 5 super model/plastic surgeon/rockstar secret agents. This gives people a warped view of how well off everyone else is.
2. Media also distorts what wealthy life is like. Most millionaires I know put in 12 hour days at work and have done for 30 years. On TV the millionaires all have free time to have multiple love affairs and plot evil schemes.
3. The article seems to be confused about income and spending. Is it income that is under discussion, or spending on oneself?

Will said at January 10, 2007 1:45 PM:

Randall and Lei et al.,

I am interested in the link between relative wealth and political power. I would argue that whether exercised or not, relatively wealthier people tend to have more political power (i.e. more ability to influence other people). Randall, in particular I think you should consider political power to be more than about captial-P "Politics" per se. Think about how much influence the wealthy can have if they so choose, through purchases, gifts, lifestyle, self-expression, etc.

However, relative wealth (in financial terms) alone does not determine political power. Restricted speech, for example, can hinder power that relative wealth would otherwise grant. It does seem to me however, that free-speech capitalist societies tend to create conditions that increase the correlation between relative wealth and political power. I imagine economists find that situation agreeable, because political power, after all, is perhaps the most important financial asset, and it would be convenient to be able to quantify it better.

Will

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