Lecture 8: Money, Economics and Well-Being

Question 1

How is money related to material wealth? 3

Answer 1

• Hedonic appeal of physical pleasures associated with wealth
• Money may bring greater access to positive rewards
• Material resources may enhance sense of autonomy (freedom to choose what you want , purpose and progress towards goals

Question 2

What are cons associated with having money and material wealth?

Answer 2

Feelings and stereotypes regarding rich people are ambivalent
* ex. perceived as intelligent and successful, but also unfriendly and cold
* since most people must earn their money, spend more time earning it and less time for leisure and social relationships
* adaptation may occur

Question 3

What does income across nations indicate about absolute income?

Answer 3

Some evidence of relation between mean income across nations & mean SWB across nations
* Far from 1:1 ratio (perfect relationship)
* Influence of other factors that vary across
nations

Question 4

What is the Easterlin paradox?

Answer 4

“At a point in time happiness varies directly with income both among and within nations, but over time happiness does not trend upward as income continues to grow”

When examining one nation overtime > no changes in happiness happens overtime , however when we look at happiness at one single point in time > happiness varies

Question 5

What is the relationship between income across nations and changes in national income? Increases vs decreases

Answer 5

• Increases in income at national level have little to no effect on well-being at national level
• Decreases in income at national level may have a negative effect on well-being at national level
• For ex. Japan GDP increased after WW2 but had no change in happiness on a national level

Question 6

What is an explanation between income across nations and changes in national income in relation to well-being?

Answer 6

• Increases in income at national level have little to no effect on well-being at national level

Possible explanations:
* at national level, changes in national income are unrelated to national well-being
* desires keep pace with rising income, thus negating the effect of increasing national income (richer > more disposable income >. ew desires > habituation)
* moderated relationship (depends on how much money that nation has in general)
* ex. correlation stronger for poorer nations compared to wealthier nations

Question 7

What does the diminishing marginal utility imply? At high and low levels of income

Answer 7

Diminishing marginal utility implies that there is a “satiation point”, beyond which increases in income do not provide gains in well-being – modified easterlin paradox

At low income levels:
* Increases in income associated with larger increases in well-being (lower levels of absolute income increase = more happiness boost > benefits get smaller the more money you have)

At high income levels:
* Increases in income
associated with smaller increases in well-being

“weak” version: there is a point after which increases in income provide smaller gains in well- being

Question 8

What did the Stevenson & Wolffers study find in relation to income across nations and changes in national income?

Answer 8

• Tested strong & weak versions of easterlin & modified easterlin hypothesis across
  nations
• Gallup world poll data (2008-2012)
• 155 countries (over 95% of world population)
• Used $15,000 as satiation point
• no evidence that the slope flattens out beyond any
  “satiation point”
• No evidence to support strong or weak versions

Question 9

What do the differences in income across nations and changes in national income seem to depend on?

Answer 9

Methodology
- Income change data from a single nation, it may appear that easterlin was correct
- Account for differences in absolute income across nations, it appears that there is support for the modified easterlin paradox
- Use panel data, account for differences in absolute income across nations, it appears that there is a positive relationship
- depends on well-being measure
- ex. kahneman & deaton (2010): diminishing marginal returns using pa & na, but no evidence of satiation point

Question 10

Relation of income and SWB

Answer 10

• Correlations between income and swb tend to be small to moderate (r = .1 to .3)
• Correlations ranged from r=.06to.45
  -The correlations between income & swb vary depending on the aspect of swb
• ex. diener & biswas-diener (2002)
• life satisfaction: r = .13
• pa:r=.13
• na:r=-.10

Question 11

What are variables that DO NOT moderate the relationship between income and SWB?

Answer 11

• Education,
• Occupation,
• Employment,
• Age,
• Domain satisfaction and marital status

Question 12

What variable do moderate the relationship between income and SWB?

Answer 12

• sex
• ex. husband’s personal income influences both own and spouse’s life satisfaction
• wealth of the society
• correlation is stronger in poorer nations than in wealthier nations
• participant sample
• correlation is weaker for college student samples (generally have low income)

There SWB does not just automatically flow from higher income > no 1:1 relationship > there are moderators that impact this relationship

Question 13

What is the relationship between changes in income and SWB?

Answer 13

• evidence is mixed (depends on methodology)
• longitudinal studies
• some studies find no effect of income changes on swb
• some studies find an effect of income changes on swb
• ex. diener et al. (1993)
  income-decline group happier than income-increase group!

Question 14

What are findings from experimental or quasi-experimental studies? Effects on well being

Answer 14

• Some studies find increased income led to higher well-being
• ex. smith & razzell (1975) – football pool winners happier than comparison group
• ex. gardner and oswald (2001) – lottery winners (> £1000) had higher well-being than comparison groups

Some studies find increased income led to lower well-being
* ex. thoits & hannan (1979) – larger payments to welfare recipients led to more stress
* ex. brickman et al. (1978) – lottery winners no happier than comparison group, but derive less pleasure from mundane pleasant activities

Question 15

What is the relationship between changes in individual income and studying lottery winners?

Answer 15

Increasing income brings both benefits and costs
* costs include: ex. declines in quality & quantity of social relationships, increased debt

Effect of having more money may depend on how you spend your money

• ex. spending money on experiences vs. material things (experiences are longer lasting, less likely to habituate as fast)
• ex. spending money on self vs. others

Question 16

Relationship between both absolute income and income changes?

Answer 16

• some empirical evidence shows a curvilinear relation between income and well- being

1. correlation stronger at lower income levels
2. correlation gets weaker as income increases
   * both suggest diminishing marginal utility of income

Question 17

Materialism related to WB

Answer 17

At both the individual and national levels, high materialism is associated with lower well-being

Question 18

What is the human nature approach?

Answer 18

• Satisfaction of innate needs is positively related to well-being > income can be used to purchase the things that help satisfy our innate needs therefore, income and well-being are positively related

Some supporting evidence
* curvilinear relation between income & swb
* little impact of increases in national income on national swb
* homeless individuals report lower well-being than non-homeless individuals

Question 19

What are problems with the human nature approach?

Answer 19

recall that richest group of individuals report being happier than second richest group, why would this be the case if both groups are meeting their basic needs?
*this suggests that there are still some needs that richest group is able to meet that second richest cannot
* how do we define and measure when basic needs have been met?
* what about those who chose to live a life relatively free of material wealth and still report relatively high levels of well-being
* suggests material wealth not used as means by which to satisfy needs

Question 20

Problems with monetary desire-fulfillment theory?

Answer 20

• sometimes we make choices that undermine our well-being
• relevant information missing, don’t know consequences, short-term focus, may act
  against own best interests
• having more options does not mean that we are more likely to make the best choice
• More options makes deciding more difficult & increases chances of making wrong choice
  wealth does not necessarily always increase range of options

Question 21

Why is income not a good indicator of wealth?

Answer 21

• income is not a valid indicator of wealth
• ignores effort needed to have income, effects of work on well-being, individual differences in financial needs, savings, borrowing/credit,
• often study gross income, which ignores effects of progressive taxes and subsidies

Question 22

What is relative standards approach and judging well being

Answer 22

people use various standards to judge their well-being
* ex.how they did in the past, how others are doing, current goals
* standards vary from time to time depending on what is salient to the individual
* thus, a person may be happy or unhappy with their level of standing depending on the level of others or how they stood in the past

Question 23

What is some supporting evidence for relative standards approach?

Answer 23

• effects of past income on swb partially mediated by influence on material desires
• effects social comparisons on swb partially mediated by influence on material desires
• consistent with the lack of relation between economic development and well-being * as economic conditions get better, standards also increase – we require more money to
  meet our standards so net effect is no change in well-being

Question 24

Diener et al study purpose

Answer 24

purpose
* is income equally related to the different aspects of swb?
* does meeting basic and psychological needs explain the income-swb relation?
* does desire fulfillment explain the income-swb relation?
* does relative standing explain the income-swb relation?
* prosperity of nations*

Question 25

What are Diener et al findings?

Answer 25

Main findings Part I:
* Income positively associated with SWB
* Pattern of correlations with income varied across components of SWB
-Stronger for life evaluations (L.S)
- Weaker for feelings (P.A and N.A)

Main Findings Part II: * Life evaluations
* Fulfillment of material desires & societal conditions, needs and income
* PA & NA
* Psychological and basic
needs

Main Findings Part III: * Life evaluations
* Income: 19% of variance * PA & NA
* Income: 3% of variance
* Psychological prosperity:
20% of variance

Question 26

What is the bidirectional relation between income and well-being?

Answer 26

some evidence suggests that well-being positively impacts income
* ex.happier people tend to earn higher income
* ex. fleming (1999) - happier people experienced a greater increase in income * ex.happier people less likely to be unemployed later

Question 27

What are findings that show a bidirectional relation between income and well-being?

Answer 27

gere & schimmack (2017)
* if income increases happiness, then household income should increase the happiness of all household members (regardless of whether income contributions)
* if happiness increases income, then the relation between income and happiness should be stronger for primary income-earners

• wvs(1981-2008)
  samples varied by identity of primary earner * mainresult
• support for “income increases happiness” hypothesis