Saturday, May 28, 2011

Desires and satiety

While the content here is somewhat focused on personal finance, I think it's beneficial to step back and examine the various things that impact our happiness the most. People often seem to be just as ill-advised about what really makes them happy as they are about how to handle their finances. It's a platitude to say that money doesn't buy happiness, but some work in behavioral finance has shown how true this statement is. Jason Zweig explains:
In 1957, the average American earned about $10,000 (adjusted for inflation) and lived without a dishwasher, clothes dryer, television, or air conditioner. But 35% of people surveyed then said they were "very happy" with their lives. By 2004, personal income had nearly tripled after inflation, and the typical house was bursting with consumer goods. Yet just 34% of people now said they were "very happy." Somehow, almost tripling our wealth has made Americans a little less happy--and still we want more.
And we still want more. That's the key right there. Above a certain level it's quite obvious that increases in wealth don't bring much more happiness. See here for where that threshold roughly is. While I'm not big on self-help books, occasionally here we'll explore what can increase happiness, as I find that kind of research fascinating. First up: schooling our desires.

H.L. Mencken once defined a wealthy man as one who earns $100 a year more than his wife's sister's husband. A paper by Neumark and Postlewaite (1998) demonstrates just how accurate Mencken's remark really was. Investigating the effect of relative income by looking at the employment decisions of women and their sisters-in-law, they find that there's a positive effect of sister-in-laws' employment on women's own employment after taking into account common explanatory variables. They explain: "women with non-working sisters are more likely to be employed if their husbands earn less than their sisters' husbands; this result is consistent with women's employment decisions being partly driven by relative income concerns, because women with relatively low-earning husbands and non-working sisters may be able to attain higher relative family income if they work." It appears that our decisions are often largely driven by our wealth as it compares to that of our family, friends, and co-workers. These comparisons are often a large source of unhappiness.

The negative effect of relative-wealth desire on our happiness is pervasive even in relatively austere China. A 2009 paper by Knight and Gunatilaka performed a survey of roughly 9,500 households in rural China to determine the effects of income aspirations on subjective well-being. They found that "aspiration income is a positive function of actual income... and that subjective well-being is raised by actual income but lowered by aspirational income. These findings suggest the existence of a partial hedonic treadmill, and can help explain why subjective well-being in China appears not to have risen despite rapid economic growth."

Essentially, wanting makes us less happy. This has a real eastern religion feel to it, but it is also one of the key tenets of the man who was called, in effect, the quintessential American, i.e., Henry David Thoreau. In Walden he remarks that "a man is rich in proportion to the number of things he can afford to let alone." Elsewhere has says that his "greatest skill in life has been to want but little." Things often have a way of encumbering us.

Accordingly, much of my time would be better spent curbing my desires rather than trying to satisfy each of them. Raise a glass to austerity.

1 comment:

  1. "He may fix his inventory of necessities and of enjoyments on what scale he pleases, but if he wishes the power and privilege of thought, the chalking out his own career, and having society on his own terms, he must bring his wants within his proper power to satisfy." --Emerson, "Wealth"