The Price of Happiness

People typically think about money in raw units such as dollars. Yet research on money and happiness typically examines the association between happiness and the logarithm of income, or Log(income). This logarithmic association between income and happiness is frequently either overlooked or misunderstood. To help address this, the present report examines this association and makes five key points. First, in a large U.S. sample, the shape of the association between happiness and Log(income) was extremely systematic: from $10,000/y to over $500,000/y, average happiness rose almost perfectly linearly with Log(income), with group-level correlations of 0.98-0.99 across a range of happiness measures, including both in-the-moment experience and overall life satisfaction. Second, a linear association between happiness and Log(income) implies that the marginal utility of additional dollars diminishes exponentially, though never mathematically plateaus. It also implies that a proportional difference in income, such as a 10% raise, would be associated with the same difference in happiness regardless of income level. Third, real-world incomes varied exponentially in size, effectively offsetting the declining marginal utility of dollars. Perhaps counterintuitively, while dollars exhibited sharply declining marginal utility for happiness, real-world incomes exhibited no decline at all. Fourth, by contrast, if trade-offs are made between people with unequal incomes - as could occur in philanthropy, compensation decisions, or tax policy - effects on collective happiness are predicted to be exponentially larger when lower-income people benefit. When it comes to money, this highlights a potential tension in the geometry of individual and collective happiness. Fifth, money’s diverging implications for happiness, linear in some contexts but exponential in others, may also help explain why income inequality persists as societies get richer, why the income distribution is shaped the way it is, and why happiness in the U.S. has not seen more improvement in recent decades. Reasoning linearly in a situation that calls for exponential thinking, or vice versa, is likely to lead to conclusions that are flawed. Knowing when to think linearly and when to think exponentially about money is crucial for understanding its relationship to happiness.