Wednesday, March 24, 2010

Everything is Relative

Today's Wall Street Journal blog (written by Robert Frank) had an interesting angle on people's feeling about their financial situation, and whether they consider themselves "wealthy" or not.

Maybe Status, Not Wealth, Makes Us Happier

Maybe money can’t buy happiness. But it can buy status, and status can indeed make us a bit happier.

An article in Time describes new research from Chris Boyce, a psychologist at the University of Warwick, and Simon Moore, a psychologist at Cardiff University. The pair sought to understand why societies that became wealthier didn’t become collectively happier. After all, rising incomes and wealth made individuals happier, up to a certain point of course.

So the researchers decided to dig deeper into what is called the “reference-income hypothesis,” a fancy way of saying that wealth is relative. If an entire country gets richer at the same time, individuals wouldn’t necessarily feel wealthier, since their relative positions in society hadn’t changed.

Most people don’t compare themselves with an abstract national average. Messrs. Boyce and Moore decided to try to figure out how people compare themselves with their neighbors, colleagues at work or friends from college. The higher their rank, the greater their sense of happiness and self-worth would likely be.

“For example, people might care about whether they are the second most highly paid person, or the eighth most highly paid person, in their comparison set,” write the authors.

They found that the person’s rank within the comparison set was a stronger predictor of happiness than absolute wealth. “If absolute income matters, as we increased our income, everybody should get happier at a national level, but we don’t seem to,” Mr. Boyce said. “So what we are showing is that in terms of life satisfaction, rank is a better predictor than absolute wealth.”

The research may help explain why there is much consternation about wealth inequality over the past two decades even though standards of living have improved for many in the lower strata.

Do you think your happiness depends in part on your wealth rank among your friends or colleagues?