Jonathan Gardner Department of Economics Warwick University CV4 7AL
Andrew Oswald Department of Economics Warwick University CV4 7AL
For their helpful ideas, we are grateful to Danny Blanchflower, Andrew Clark, Ed Diener, Jane Hutton, BruceSacerdote, Jon Skinner, Alois Stutzer, and Ian Walker. The Economic and Social Research Council provided research support.
Abstract The most fundamental idea in economics is that money makes people happy. This paper constructs a test. It studies longitudinal information on the psychological health and reported happiness of approximately 9,000 randomly chosen people. In the spirit of a naturalexperiment, the paper shows that those in the panel who receive windfalls -- by winning lottery money or receiving an inheritance -- have higher mental wellbeing in the following year. A windfall of 50,000 pounds (approximately 75,000 US dollars) is associated with a rise in wellbeing of between 0.1 and 0.3 standard deviations. Approximately one million pounds (1.5 million dollars), therefore, wouldbe needed to move someone from close to the bottom of a happiness frequency distribution to close to the top. Whether these happiness gains wear off over time remains an open question.
Does Money Buy Happiness? A Longitudinal Study Using Data on Windfalls Jonathan Gardner and Andrew Oswald 1. Introduction The central tenet of economics is that money makes people happy. Using deduction, ratherthan evidence, economists teach their students that utility must be increasing in income 1. In this paper we construct one of the first empirical tests. Our results, using two measures of mental wellbeing, show that the economist’s textbook view is correct. We also estimate the size of the effect of a windfall on wellbeing. To make persuasive progress on this problem, data with three specialfeatures are required. First, it is necessary to have a panel of people, that is, longitudinal rather than purely cross-sectional information. Second, measures of psychological wellbeing are needed. Third, it is necessary to observe, whether by an actual or natural experiment, a random assignment of money amongst individuals. We have a data set that approximates these conditions. As far as we know,previous investigators in economics or psychology have been unable to implement such a test. Diener and Biswas-Diener (2000) argue that this form of research design is required. Individuals' survey responses to questions about wellbeing are used in the paper. Such responses have been studied before. They have been used intensively by psychologists2, examined a little by sociologists and politicalscientists3, and largely ignored by economists4. Some economists may emphasise the likely unreliability of subjective data
1 A common approach would be to argue that more income simply must make people happier because it opens up extra choices that are denied those with less money; yet in principle human beings might find it costly to make more decisions about how to spend the greater income.Another argument might be that people seek more income whenever they can, so that it necessarily makes them happier; yet in principle they could be mistaken about how they will feel ex post. However, the best reason to want empirical evidence is that it is dangerous for any subject to reach the point where it cannot be conceived that a familiar assumption might be wrong. 2 Earlier work includes Andrews(1991), Argyle (1989), Campbell (1981), Diener (1984), Diener et al (1999), Douthitt et al (1992), Fox and Kahneman (1992), Larsen et al (1984), Mullis (1992), Shin (1980), Veenhoven (1991, 1993), and Warr (1990). 3 For example, Inglehart (1990) and Gallie et al (1998). There is also a related empirical literature on interactions between economic forces and people’s voting behavior; see for...