Everyone who has taken a course in economics is aware of utility theory and the desire to have more “utils.” Those with a historical focus will recall the deep discussions of an early 19th-century economist, “utilitarians,” and the dismal science. The concept of measuring and auditing happiness has resurged in economic research, but it has been a perplexing problem. The basic idea with economics and finance is that money can buy you happiness, but the reality is more complex.
One of the leading researchers working in this area was Alan Krueger, who tragically died last week. He was a leading empiricist in economics who generated path-breaking research in many key fundamental problems and was a strong advocate for using economics to solve complex policy problems. An ongoing research area for him was the study of happiness and its measurement. Interestingly, one of his key collaborators in this area was Dan Kahneman, the behavioral economics expert.
Empirical research on happiness is challenging. There are many problems with measurement, and the psychology of happiness is very complex. For example, there is a gap between experienced and remembered utility. There is also a focusing illusion such that when we consider the impact of any factor on well-being, they are exaggerated in importance. Researchers have delved deeply into time surveys and the measurement of subjective well-being. Given his keen skills as an empiricist, Alan Krueger has been at the forefront of this research.
From a finance and wealth perspective, his research is somewhat unexpected. His clear conclusion is that money does not buy your happiness. The level of life satisfaction and happiness for those with high income is not different than those with lower income as measured by their actual experiences. Granted, there is a need for some minimum income, but the diminishing gains from income are strong. This conclusion is worth considering as we grind forward trying to add to our wealth portfolios.