Does more money buy you more happiness?
AbstractWhy do we believe that more money will buy us more happiness (when in fact it does not)? In this paper, we propose a model to explain this puzzle. The model incorporates both adaptation and social comparison. A rational person who fully accounts for the dynamics of these factors would indeed buy more happiness with money. We argue that projection bias, that is, the tendency to project into the future our current reference levels, precludes subjects from correctly calculating the utility obtained from consumption. Projection bias has two effects. First, it makes people overrate the happiness that they will obtain from money. Second, it makes people misallocate the consumption budget by consuming too much at the beginning of the planning horizon, or consuming too much of adaptive goods.
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Bibliographic InfoPaper provided by IESE Business School in its series IESE Research Papers with number D/683.
Length: 28 pages
Date of creation: 14 Feb 2007
Date of revision:
Happiness; Life Satisfaction; Social Comparison; Consumer Life-Cycle Planning; Projection Bias;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-11 (All new papers)
- NEP-HAP-2007-06-11 (Economics of Happiness)
- NEP-HPE-2007-06-11 (History & Philosophy of Economics)
- NEP-MAC-2007-06-11 (Macroeconomics)
- NEP-SOC-2007-06-11 (Social Norms & Social Capital)
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