This is what happens when you cede your thinking to journalists and let them write your headlines for you. Misinterpretation abounds and becomes calcified as fact.
4 years ago, a famous study appeared that was said to conclude that the optimal salary for human happiness was $75,000. No word on what the optimal effective tax rate, optimal local cost of living or optimal amount of expenses were, but you can’t expect the media to understand concepts that have multiple layers. By the way, we could have attached any of a million other links, but simpletons still regard Time magazine as some sort of authority for some reason. Actually, what the hell: here are some more, running the political continuum all the way from the Wall Street Journal to the New York Times. It should go without saying that every unimaginative personal finance blogger wrote her own evaluation of the study, too.
Happiness tracks salary up to $75,000, then it either levels off or declines. If you’re not skeptical when you read something like that, ask yourself why you aren’t. There isn’t an employee anywhere on Earth making >$75,000 who has demanded a pay cut to the so-called optimal level. From real-world observation, we know plenty of people making much more than $75,000 who seem to be having the time of their lives. So wherefore the study?
One of the 2 principals behind the study is Daniel Kahneman, the 2002 Nobel economics laureate and all-around smart guy. His 2011 book Thinking Fast And Slow is illustrative nonfiction, lay cognitive psychology for people who have graduated past Malcolm Gladwell and have a hankering for something more rigorous. We bought the book recently, knowing of Kahneman but unaware that he was half the brains behind the $75,000 study. Reading the book, we realized that everyone completely missed the point.
Kahneman did reference $75,000/year as being a maximum of sorts, and makes repeated use of his own idiomatic term “experienced well-being” in conjunction with the $75,000 figure, but he didn’t say that $75,000/year was the ideal salary for human happiness or make anything close to such a wild and counterintuitive proclamation. What he said takes more words to explain than there are in a typical headline.
In any group of people, there will be some with feelings of despair. Unsurprisingly, the poorer the group is, the greater the proportion of people in it who have said feelings. This isn’t exactly news. Maybe 19% of people in a high income bracket and 38% of people in a low income bracket feel these negative thoughts, according to Kahneman’s research.
Now add a mildly deleterious event, like a headache. That’s enough to turn even more people despondent, and it does. The headache will increase the proportion of rich people who feel depressed, and it will do the same for the poor people. But it’ll do the latter to a greater extent. Compound their situation with a headache, and an additional 19% of rich people will be sad and/or worried. Add that same headache to the subset of poor people, and an additional 32% of them will acknowledge feelings of depression. (All numbers taken from Thinking Fast and Slow.) A minus, even one that a Tylenol or two will cure within hours, slams the poor worse than it does the rich. Again, these discoveries don’t seem all that revelatory, at least to us.
Now, imagine a positive event of similar absolute value. A hole-in-one, your kid coming home with a report card full of straight A’s, a stranger paying you a compliment, whatever. That ought to improve your mood no matter how much money you make. Among poor people, the percentage of them whom such an event will put in a bouncy mood will increase. Among rich people, most of whom are happier than the poor folk to begin with, the numbers will also increase when the positive event happens. But of course, this is bounded. If 99% of people who make $1 million a year are generally ecstatic to begin with, all the strokes of good fortune in the world aren’t going to increase the ranks of such people by more than a percentage point.
What Kahneman said was that the biggest increase in well-being happens around $75,000 a year. Mathematically speaking, that’s where dy/dx, the 1st derivative of the curve, is its highest. If you’re an adult making $20,000/year, chances are relatively strong (relative to people who make higher incomes) that your outlook on life is going to be pretty bleak. A random positive event will increase the percentage of people at that income level who feel happy and optimistic, but not by that much – only a few percentage points. Conversely, at the upper end of income, the random positive event will indeed turn some frowns upside-down – but at that level, the frowns are rare to begin with. $75,000 marks the point at which a positive occurrence makes the largest difference, moves the most people from morose or lukewarm into bags of joy. As Kahneman says,
Being poor makes one miserable, and…being rich may enhance one’s life satisfaction, but does not (on average) improve experienced well-being.
Which requires an explanation of the difference between “life satisfaction” and “experienced well-being.” He defines the latter as your day-to-day or minute-to-minute answer to “How are you feeling?” The day that the guards bring the monthly allocation of bean paste to the prisoners at Pukchang prison camp is great, relative to the 30 that surround it. “Life satisfaction” is something a little more broad: “the satisfaction of the remembering self.” And that, rich people have an abundance of.
So in short, Kahneman said that if you were to quantify one’s reaction to a good thing happening, the important variables are 1) the event itself and b) the person’s starting point. And a modest starting point will mean a greater increase in “experienced well-being.” Think about it: who gets a bigger thrill from hitting a home run – the 20-year-old just called up from Toledo and making his major league debut, or Albert Pujols, who’s already done this thing 492 times? That doesn’t mean that the guy fighting to stay on a big-league roster is somehow in a better position than a 3-time MVP and future Hall of Famer.
To the lay person’s ears, distinguishing between experienced well-being and life satisfaction might seem like nothing more than coming with unnecessary alternate phrasings for “happiness”. But there’s a difference. One is marginal, the other cumulative. Cumulative is better. It’s “he who dies with the most toys” who wins, not “he who has the greatest temporary increase in happiness with the addition of a particular toy.” Debunking these stupid myths is fun.