I wrote a graduate economics thesis on the correlation between money and happiness, so I’m interested any time it’s announced that there is a big lottery winner, like last week’s. The jackpot of close to $600 million will be split between two winning tickets. The lottery makes a fascinating case study of financial psychology in terms of the money-happiness correlation, but before getting to that, a few notes on lottery-related research.
A 2010 paper published by Vanderbilt University, the University of Kentucky and the University of Pittsburgh grouped lottery winners into “sizeable” winners who won between $50,000 and $150,000 and “modest” winners, with prizes of $10,000 or less. Looking at the winners five years after collecting their prize, the “sizeable” winners were more likely to have filed for bankruptcy. Of further interest is the fact that five years post-win, there was almost no difference in terms of assets and debt between the sizeable and modest winners. For those interested in the specifics of the study, pre-lottery assets and debt were controlled for, such that the pre-winning financial situation was not the determining factor in the five year post-win results.
There’s no question that $150,000 is far different from $600 million, but anecdotally, many cases of “mega-winners” going bankrupt exist. A first layer analysis would suggest that since lottery players are heavily skewed towards low net worth individuals, it stands to reason that those most likely to win are people who, by definition, do not have a good track record of managing money well. However, looking at a second layer, we have to account for the psychological effects of winning such an enormous sum of money, and the lack of care and discretion that can develop in a winner who comes across what could and should be a multigenerational nest egg of money.
This takes us back to the money-happiness correlation. In surveys, most people predict that additional money would bring them additional happiness at just about every level of income, from poverty to the top 1%. A study done by Richard Easterlin of the University of Southern California showed that while in snapshot data, richer people within specific countries were happier than poorer people, and that richer countries were happier than poorer countries, over the long term, this did not hold true. Studies looking at actual money-happiness correlations across income levels within countries and in the aggregate comparing one country to another over time suggest something very different. My paper, based on information available through 2008, found that happiness does increase in direct proportion to money only up to the level of about U$D10,000, or the equivalent in the buying power it represents in any country’s local currency.
I admit that these numbers even surprised me, but as many times as I repeated the graphs and charts and ran the numbers with different sets of data, there was no significant correlation between money and happiness once the $10,000 level was passed. My expectation was that there would be a drop-off in the money-related happiness increase, but I expected it to be around the $45,000 or $55,000 level. I was wrong.
Clearly, the perception that more money will make one happier does not correlate with the data, but that shouldn’t come as a surprise to anyone. While increases in income or assets can make people less displeased with their lives as related specifically to their level of income, it cannot really make up for other areas of life that may be lacking.
An additional area of interest came when looking at aggregate happiness levels from one country to another, and looking at some of the outliers. Venezuela is a country that often shows up at the top of the happiness indices while having a low GDP per capita. People who live in Venezuela may be able to shed light on why this is. In China, where GDP per capita has nearly doubled in a short period of time, happiness hasn’t increased at all. We could make a number of theories about the political and social factors that are holding happiness down in China, but that would be its own case study.
As the latest and other future lottery winners are revealed, remember the studies – while many people would expect that such a cash windfall would bring new levels of happiness and satisfaction, more and more people are becoming in tune with the reality – or lack of reality – in those expectations. There’s no question that for the countless poor in the US and around the world, reaching a basic subsistence level would have a profound effect on their lives and satisfaction – however, for people living with most of the modern “luxuries” that we have today, the effect would be underwhelming.
David Pakman, host of the internationally syndicated political talk radio and television program, “The David Pakman Show,” writes a monthly column. He can be reached at www.davidpakman.com.