Does More Money Buy You More Happiness?

Manel Baucells () and Rakesh K. Sarin ()
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Manel Baucells: University of Navarra
Rakesh K. Sarin: University of California

A chapter in Decision Modeling and Behavior in Complex and Uncertain Environments, 2008, pp 199-226 from Springer

Abstract: Why do we believe that more money will buy us more happiness when in fact it does not? In this chapter, 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, 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 adaptative goods.

Keywords: Reference Level; Social Comparison; Optimal Plan; Total Utility; Rich People (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1007/978-0-387-77131-1_9

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