Easterlin Paradox

A timely article, again from Yahoo!Finance, which may be of interest to those who consider it appropriate to reveal and discuss earnings with strangers:

Two Tips for Boosting Your Happiness
by Laura Rowley
Thursday, April 8, 2010

Henry Louis Mencken once wrote, "Wealth (is) any income that is at least one hundred dollars more a year than the income of one's wife's sister's husband." A new study suggests that's what matters most when it comes to money and happiness -- not absolute income, but where we rank compared to peers.

Researchers Christopher Boyce and Gordon Brown at Britain's University of Warwick were intrigued by the "Easterlin paradox" -- a phenomenon first articulated by psychologist Richard Easterlin, who found big jumps in economic growth in nations such as the United States and Japan were accompanied by declines, or only marginal increases, in reported happiness.

"We were trying to understand why money doesn't bring as much happiness as one might expect, particularly to understand why happiness levels in developed countries are flat over time and have not risen in line with income growth," Boyce wrote in an email.

Other studies have suggested that within countries, it isn't absolute income that matters to happiness, but how one's income compares to people in a social reference group, including work colleagues, neighbors or fellow college grads. This is known as the "reference-based model."

For example, a 1995 Harvard survey asked college students if they would prefer to live in a society where they had an income of $50,000 and the average person earned $25,000; or one in which they had an income of $100,000 and the average person earned $200,000. More than half chose the income that was lower in absolute terms but twice the average, according to the study published in the Journal of Economic Behavior and Organization.

Boyce and Brown examined data from 12,000 adults in a panel study from 1997 to 2004. They conclude a "rank-based model" matters more to happiness. It still depends on comparison, as does the "reference-based model," but with a slight twist: Let's say you're the top earner in your reference group, and your pay rises 10 percent, while everyone else's remains the same. Under the reference model, your happiness would increase because you got a boost and others didn't. But under the rank model, the raise wouldn't affect your happiness since you're already the alpha dog. What matters is not the change to your income, but your relative rank.

The pattern has shown up in other countries as well. Economist Carol Graham identified a group she calls "frustrated achievers" in Peru. Nearly half of Peruvian workers with the most upward income mobility reported that their economic situation was negative, or very negative, compared to 10 years prior because they perceived themselves as ranking lower on the economic ladder than others.

In practical terms, I think allowing our happiness to depend on either the reference or rank model is profoundly silly. Most people have no idea what their peers earn. We create a proxy of earnings based on consumption behavior, which is even sillier, since we may be comparing ourselves to someone drowning in consumer debt to support a lavish lifestyle.

"I don't think people have a clear idea of how much others earn, and I do think that they create a mental proxy through their perceptions of others," Boyce agreed. "It is these perceptions that are the most important, but clearly our data does not contain such information. I think this could easily be a false proxy, and could have consequences for how we choose to live. Our perceptions of others may be encouraging people to work harder than they would ideally like to just to keep up with everyone else. And I think it is very likely that such false proxies may be encouraging people to draw on credit."

For Boyce, the takeaway is that once people earn enough money to meet basic needs, "the relationship between income and well-being is very low," he notes. "To the extent that it does matter, it is how income relates to others. It is important for individuals to be aware of this as it could mean that the race for status through income can only make us work harder with little payoff.

"We would be much better placed (both individuals and nations) to concentrate less on the pursuit of wealth and on aspects of life that have been shown to produce a more sustainable increase to well-being," Boyce continues. "For example, investing in our mental health, spending time with friends and family and understanding that internal processes (such as our personality) have a greater impact on well-being than external factors."

A new study published in Psychological Science suggests that people may want to add another low-cost activity to that group -- engaging in meaningful conversation with others.

Researchers from the University of Arizona and Washington University in St. Louis equipped 79 college-aged men and women with a small digital recording device that sampled 30-second conversation snippets every 12.5 minutes over four days. Participants filled out psychological surveys about their well-being and personality three weeks apart. (Three friends also assessed the participant.)

The conversations were sorted into "small talk" and "substantive" categories. "Small talk is uninvolved conversation where only trivial information is exchanged," says Matthias Mehl, assistant psychology professor at the University of Arizona and co-author of the study. "Substantive is a little trickier. We don't have too many conversations on a daily basis that would qualify as truly deep, but we wanted them to be engaged or involved in a topic where meaningful information is exchanged." (Functional talk -- i.e., "whose turn is it to take out the garbage?" -- and school-specific topics were eliminated.)

The happiest people spent about 25 percent less time alone and 70 percent more time talking compared to participants at the bottom of the well-being scale. In terms of content, the happiest people had twice as many substantive conversations and a third as much small talk as the unhappiest folks.

"The higher the percentage of all conversation allocated to small talk the more unhappy people are," says Mehl. He who gave a personal example: "We learned in the aftermath of my daughter's birth how dramatically the conversational landscape shifts. We mourned the loss of substantive talk other than baby-related issues. There are so many things to organize and newly establish and negotiate, you can't have any nonfunctional conversation about things in life. That -- and sleep deprivation -- is what has made us most unhappy."

But the study presents a chicken-and-egg problem: Do meaningful conversations make people happier, or does happiness cause people to seek more depth in their interactions?

"As scientists we don't know," says co-author Simine Vazire, assistant psychology professor at Washington University. "It might be worth trying to engage in more deep conversations. It doesn't have to be about philosophy or religion, you can have deep conversations about sports. It also doesn't require more self disclosure, but getting beyond the script of a superficial encounter."

Alternately, Vazire adds, "if you want to have more real connections with people, try to act happier and see if that leads to more meaningful conversation."