Psychology professor emeritus Daniel Kahneman, who won the Nobel Prize in economics in 2002, and Wilson School professor Angus Deaton, a past president of the American Economic Association, collaborated on a study of this classic question using survey data from roughly 450,000 respondents on income and measures of happiness.
They found that while people’s life evaluations increase with income, their emotional well-being levels off above an income of $75,000. The researchers based their study on responses to the Gallup Healthways Well-Being Index, a survey of 1,000 U.S. residents conducted by the Gallup Organization every day that evaluates emotional well-being, based on questions about emotional experiences, and life evaluation, or respondents’ thoughts on their lives ranked on a scale of zero to 10.
“The results were quite surprising,” Kahneman said, noting that he has been studying the data set for some time. “Nobody would expect [an] absolutely flat response with no difference between the two top categories.”
Deaton said that $75,000 was not the particular number they anticipated, but that it did seem reasonable. He emphasized that the most important result of their study was the distinction between the two concepts of happiness, adding that those looking toward the study’s potential policy implications must first determine which is more important.
The intersection of psychology and economics in the study reflects a recent trend among academics of combining the fields to better understand people’s priorities and behavior.
“Economists can’t understand this without working with psychologists,” Kahneman said. “We both have to revise our views. Approaching these new topics is very hard if we don’t work together.”
Fellow Wilson School professor Elizabeth Bogan lauded the changing academic environment, explaining, “Does economics need more psychology? The answer is yes, although we might not have said the same thing 30 years ago.”
Both Kahneman and Deaton acknowledged the limitations of their study.
The research did not account for family size or geographical location, Deaton said, noting, “People say, ‘I live in New York, and I can’t get by on $75,000.’ ”
Another variable possibly relevant to the results is the economy. Kahneman said he doubts that their results would be fundamentally different at another time, but Deaton said it is hard to be sure.
“Words like ‘happiness’ are used in a very loose sense,” Deaton explained.
Kahneman said that limitations to the current study could be taken into account in further research.
“People will be studying [this topic] for a long time,” he said. “Because of the strained results, it will induce people … to look at what might change.”
Bogan said there are several other potential policy implications to connecting economics to new understandings of well-being. “What I think they are trying to show is that utility doesn’t keep rising from having goods and services at that income, and that says something if we are trying to maximize utility by policy. I think it could be an argument for policies that could help people become more productive who are currently below that level.”
She said that such studies could also be cited by policy makers, explaining that “people are interested in justifying progressive taxes.”
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