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Does More Money Buy You More Happiness?

In: Decision Modeling and Behavior in Complex and Uncertain Environments

Author

Listed:
  • Manel Baucells

    (University of Navarra)

  • Rakesh K. Sarin

    (University of California)

Abstract

Why do we believe that more money will buy us more happiness when in fact it does not? In this chapter, we propose a model to explain this puzzle. The model incorporates both adaptation and social comparison. A rational person who fully accounts for the dynamics of these factors would indeed buy more happiness with money. We argue that projection bias, the tendency to project into the future our current reference levels, precludes subjects from correctly calculating the utility obtained from consumption. Projection bias has two effects. First, it makes people overrate the happiness that they will obtain from money. Second, it makes people misallocate the consumption budget by consuming too much at the beginning of the planning horizon, or consuming too much of adaptative goods.

Suggested Citation

  • Manel Baucells & Rakesh K. Sarin, 2008. "Does More Money Buy You More Happiness?," Springer Optimization and Its Applications, in: Tamar Kugler & J. Cole Smith & Terry Connolly & Young-Jun Son (ed.), Decision Modeling and Behavior in Complex and Uncertain Environments, pages 199-226, Springer.
    • Handle: RePEc:spr:spochp:978-0-387-77131-1_9
    DOI: 10.1007/978-0-387-77131-1_9
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    Citations

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    Cited by:

    1. Moris S. Strub & Duan Li, 2020. "Failing to Foresee the Updating of the Reference Point Leads to Time-Inconsistent Investment," Operations Research, INFORMS, vol. 68(1), pages 199-213, January.
    2. Manel Baucells & Rakesh K. Sarin, 2010. "Predicting Utility Under Satiation and Habit Formation," Management Science, INFORMS, vol. 56(2), pages 286-301, February.

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