I have written previously about the price of happiness – about $125,000. Specifically, analysis of the (then) Ministry of Social Development’s Quality of Life Survey data showed that the relationship between income and wellbeing was stronger for quality of life than for happiness (a technical distinction for lay-folks, I suspect) and was steepest for people earning up to $65,000. Every thousand above that $65k produces diminishing returns up to about $125,000, at which point quality of life and happiness plateau.
According to the survey, an unsurprising strong predictor of the income-wellbeing relationship is the respondent’s self-reported ability to meet everyday needs. Maslow’s Hierarchy of Needs theory nods at this – it’s hard to be happy when you’re struggling to pay for the roof over your head and breakfast for the kids.
This research feels more relevant now in the context of our cost of living crisis. Political parties campaigned on it in the lead-up to the election, and the government is rifling through the cupboards and looking down the back of the couch to find the cash to deliver the tax breaks it has promised.
But … the dollars I’m citing are now a decade out of date – “How much happiness does money buy?” was published in 2012, based on data collected in 2008. In 2008 dollars, $125,000 in wages is the equivalent of $210,000 in late-2023 money … It’s an open question whether the price of happiness right now is $210k. According to the Inland Revenue Department, 1.9% of New Zealanders earned or exceeded that amount in 2023. No wonder we’re all glum. To be fair, 1.8% of us earned more than $125,000 back in 2008.
When you’re struggling to pay the bills, it’s be hard to be optimistic. And, financially, that may be a good thing.
We’ve long known that many of us move through the world with a positive illusory bias – we tend to see things as rosier than they are – and it’s generally considered to be adaptive. But a new study authored by Chris Dawson at the University of Bath has some interesting things to say about optimism in the context of financial decision-making. Dawson looked at 10 years of data from about 36,000 Britons to examine “unrealistic” optimism – in this study, when a person undershoots or overshoots their prediction regarding their next-year’s financial circumstances. About one in 10 predictions were to be better off next year but, rather depressingly, only half of those predictions came to pass. In fact, 35% of folk who anticipated a better financial year actually ended up in a worse financial position.
The pattern is more or less the same regardless of whether people said they’d be worse off, about the same, or better off – about as many people ended up better off as did worse.
The punchline in this research was what predicted unrealistic optimism. Participants also completed a set of tasks that briefly tested memory, mathematical performance, reasoning and fluid reasoning (how well we adapt to new information in the absence of relevant experience), and people whose predictions were pessimistic or realistic did better on these tasks than those who were moderately or extremely optimistic.
The headlines of popular media articles reporting on this research say things like “Being optimistic can lead to making bad decisions” or “optimism linked to poor decision-making and lower cognitive skills”.
There’s a lot going for this study, including the massive sample and the care with which Dawson controls for the sorts of things that are important for cognitive ability, but we’re talking about rather small differences. I’m certain those small differences are important but it’s also clear that a lot of other factors drive optimism.
I’ve long joked that I have low expectations myself; you’re rarely disappointed.
