Putting a price on happiness

/ Source: Forbes

What makes people happy? Philosophers and psychologists have long pondered this question; now economists are mounting their own effort to measure contentment.

This focus on happiness did not come naturally to practitioners of the dismal science. They traditionally focused on "utility," assuming that the more people were willing to pay for something, the more utility it had. But it turns out that a $200 item may not generate more happiness than a $20 item, an $80,000 annual income may not cause much more happiness than a $50,000 income, and a Mercedes may not confer much more happiness than a Ford or a Chevy. This has led to a new focus: If money doesn't necessarily buy happiness, what does?

Economists, with some exceptions, are not in the business of conducting experiments. They work with existing survey data — particularly the General Social Survey, a massive biannual study compiled by researchers at the National Opinion Research Center at the University of Chicago. This survey has been administered 24 times since 1972 and has yielded 40,000 responses to date, according to Tom Smith, the center's director. While the questions vary every year, they have always included questions about happiness.

In addition to the GSS data, there are "data sets on about 1 million randomly sampled people ... from 20 or 30 countries" who are asked to rate their level of contentment on a scale of one to ten, according to Andrew Oswald, an economics professor at the University of Warwick in England.

This simple tool yields accurate results, says Daniel Gilbert, a psychology professor at Harvard. If you ask people whether they are happy right now, "they can tell you," Gilbert says. There are errors, but the errors are random and even out. Overall, answers jibe with neurological tests, facial expressions and other results. But when you ask people how happy they were in the past, or ask them to predict their future happiness, "you get all sorts of crazy answers," Gilbert says.

The National Opinion Research Center makes its data available in raw form. Social scientists can use it to assess whether Americans are happier or less happy than in the past. They can also compare the happiness of rich versus poor, black versus white or male versus female.

Researchers such as Oswald and Dartmouth economist David Blanchflower have also used GSS data to assess what other factors — such as marriage, sex or health — make people happy, either in absolute terms or compared with money. The data allow some fairly certain conclusions, Blanchflower says: Happiness has remained fairly constant over time, despite rising incomes; women are happier than men, though the gap is getting smaller; happiness is U-shaped, meaning people are happiest when they are very young and very old and least happy around age 40; unemployment reduces happiness, even beyond what might be explained by the reduction in income; and marriage adds to happiness, as does regular sex.

Money makes people happier too, at least at an individual level. On the other hand, among reasonably prosperous societies there does not seem to be any strong correlation between the overall level of happiness and the level of wealth.

"The effects of money on happiness in general are not large," says Ed Diener, a psychology professor at the University of Illinois and a leader in the science of measuring happiness. "The effects of living in a wealthy nation are stronger — people in wealthy nations show higher levels of [self-reported well-being], and this is true for all levels of wealth within nations," he adds.

This insight has led Diener, among others, to advocate the creation of a "national well-being index." This measurement, which would gauge items like "engagement, purpose and meaning, [and] optimism and trust," would allow policymakers to know how happy people are, and perhaps what might be done to increase their well-being a notch or two.