1. Chapter 9: Money and Happiness: Implications for Investor Behavior

2. Topic Covered Can Money Buy Happiness? Can Happiness Buy Money?
Measurements of Happiness
Income and Happiness
Work and Happiness
Spending and Happiness
Materialism and Happiness
Macroeconomic Factor and Happiness
Economic Growth and Happiness
Economic Policy and Happiness
Can Happiness Buy Money?
Implications for Investor Behavior

3. Can Money Buy Happiness?
Measurements of Happiness
In the literature of happiness research, happiness refers to subjective well-being (SWB), which can be defined in different ways.
According to Diener et al. (1999, p. 277), subjective well-being is “a broad category of phenomena that includes people’s emotional responses, domain satisfactions, and global judgments of life satisfaction.”
Diener (1984) identifies several characteristics of SWB. First, SWB is subjective, residing within the individual, and is based on an individual’s unique experience of the world. Second, SWB includes positive experience, rather than just the absence of negative factors. Third, researchers usually consider SWB from a broad level, as an overall assessment, rather than according to specific experiences or aspects of an individual’s life.

4. Cont.
Researchers use various measures of happiness or SWB. For example, Dolan, Layard, and Metcalfe (2011) divide measures of SWB into three broad categories: evaluation, experience, and eudaimonic. The evaluation measure refers to life satisfaction and domain satisfactions.
The experience measurement equates to happiness yesterday and positive or negative affect (worried, energetic, or relaxed yesterday).
The eudaimonic measure refers to purpose in life. It asks people to identify purpose in life in general and purposes and meanings of specific activities.

5. Cont. Income and Happiness
Income effects may vary when using different measures of happiness.
Kahneman and Deaton (2010) examine the effect of income on SWB. They measure SWB using two sets of variables: emotional well-being and life evaluation.
Emotional well-being or daily happiness refers to the emotional quality of an individual’s everyday experience (i.e., the frequency and intensity of experiences of joy, stress, sadness, anger, and affection) that make a person’s life pleasant or unpleasant.
Life evaluation or life satisfaction refers to the thoughts that people have about their life when they think about it

6. Cont.
Happiness researchers also observe the adaptation effect, which is the positive effect of personal income on happiness lasting over time. People are happy when their incomes increase. The effect decreases over time but lasts for several years.
Aspiration may play an important role in the relationship between income and happiness. Easterlin (2001) finds that material aspiration is initially fairly similar among income groups; consequently, more income brings greater happiness.

7. Cont. Work and Happiness
Most people make money by working. Job satisfaction and career satisfaction are closely related to happiness. Work characteristics such as work hours and job fit may affect happiness.
Clark (2010) examine relationships between work and happiness. He finds a wide gap in well-being between employment and unemployment and no evidence that individuals adapt to unemployment.
Tadic et al. (2012) examine the role of work status (i.e., working versus not working) in the relationship between time-use and momentary happiness. The results reveal that working older individuals are not happier than nonworking individuals.

8. Cont.
Worker characteristics affect job satisfaction. Clark (1996) examines factors associated with job satisfaction with data from 5,000 British employees. He finds that men, workers in their thirties, the well-educated, those working longer hours, and workers in larger establishments have lower levels of job satisfaction.
Some researchers consider career satisfaction as a measure of job satisfaction in the longer term. Career satisfaction as a whole is stable in the long term but one of its components (e.g., income) may be a factor that causes dissatisfaction

9. Cont. Spending and Happiness
Consumer financial behavior may affect happiness. Lyubomirsky, Sheldon, and Schkade (2005) review the literature of happiness research and summarize three broad factors that influence happiness: set points (50 percent), circumstances (10 percent), and intentional activity (40 percent).
Spending for others may also increase happiness. Dunn, Aknin, and Norton (2008), who examine the relationship between prosocial spending behavior and life satisfaction, find that spending on others contributes to life satisfaction.

10. Cont. Materialism and Happiness
Materialism refers to the tendency of seeking material goods as the life goal.
Richins and Dawson (1992) view materialism as a consumer value. They describe a valuesoriented materialism scale with three components: acquisition centrality, acquisition as the pursuit of happiness, and possession-defined success.
In validation tests, high scorers desire a higher level of income, place greater emphasis on financial security and less on interpersonal relationships, prefer to spend more on themselves and less on others, engage in fewer voluntary simplicity behaviors, and are less satisfied with their lives.

11. Cont.
Seeking materialism may result in a low level of happiness. Kasser and Ryan (1993) examine associations between values/expectancies for wealth/money and personal well-being and find negative associations between the two sets of factors. Their results show that the relative centrality of money-related values and expectancies is negatively related to college students’ well-being and mental health.
Materialism may increase life satisfaction indirectly through luxury consumption. Hudders and Pandelaere (2012) conduct a large scale survey in Dutch-speaking Belgium and find that materialistic consumers are more inclined to consume luxury goods than less materialistic consumers.

12. Cont. Macroeconomic Factors and Happiness
Consumer well-being is jointly determined by the economic environment. Many macroeconomic factors such as unemployment, inflation, income inequality, economic growth, and economic policy may affect happiness.
Undesirable macroeconomic indicators may have differential negative effects on happiness. Di Tella et al. (2001) find that people appear to be happier when inflation and unemployment are low.
Inequality may decrease happiness but differences exist between countries. Alesina, Di Tella, and MacCulloch (2004) find that individuals have a lower tendency to report being happy when inequality is high.

13. Cont. Economic Growth and Happiness
The Easterlin Paradox is the most controversial part of income and happiness research. Easterlin (1974) shows no association between life satisfaction and economic growth.
In the past 40 decades, Easterlin and many other researchers repeatedly confirm this fact with data from both developed and developing countries and using both cross-sectional and longitudinal data (Easterlin and Sawangfa 2010).
Some researchers even document a negative association between per capita income growth rate and life satisfaction, which is labeled the paradox of unhappy growth (Graham, Chattopadhyay, and Picon 2010).

14. Cont.
Other researchers also provide evidence to support this paradox. For example, Blanchflower and Oswald (2004) find that reported levels of well-being have declined over the last quarter of a century in the United States and life satisfaction has run approximately flat through time in the United Kingdom.
Some researchers claim that their evidence does not support the Easterlin Paradox (Deaton, 2008; Stevenson and Wolfers 2008).
However, several major researchers believe the evidence is not strong enough to solve the paradox (Easterlin and Sawangfa, 2010; Layard, Mayraz, and Nickell 2010).
The general consensus now is that the relationship between economic growth and happiness is complicated and requires more systematic data collection in a broader scale and longer time frame to clarify the issue (Diener et al. 2010).

15. Cont. Economic Policy and Happiness
Public perceptions of social policies contribute to SWB (Wong, Wong, and Mok 2006). Progressive policy makers also need to hear people’s perceptions and evaluations of existent and new social policies in addition to information from objective measures (Veenhoven 2002).
Xiao (2012) find that perceived fairness of social security and income distribution policies are positively associated with SWB.

16. Can Happiness Buy Money?
Many happiness research studies attempt to examine whether higher income contributes to happiness.
However, some researchers explore whether happiness would increase one’s income. If they find causality, SWB may be a factor to be promoted to increase productivity for society.
Oishi (2012) considers happiness as psychological wealth and contends that a nation’s psychological wealth is important for a good society.
Researchers document the causal relationship between happiness and positive life outcomes, including economic outcomes. Happiness may result in positive life outcomes.

17. Cont.
Happiness may contribute to job satisfaction and high income. Diener et al. (2002) examine the relationship between dispositional affect and job outcomes at college entry on three job outcomes (i.e., current income, job satisfaction, and unemployment history) assessed about 19 years later. The results show that individuals with a higher cheerfulness rating at college entry have a higher current income and a higher job satisfaction rating and are less likely ever to have been unemployed than individuals with a lower cheerfulness rating.
Happier people make more money but the association may be nonlinear, especially in the high end of the happiness spectrum. Different life outcomes may occur between moderately and extremely happy people. Oshi, Diener, and Lucas (2007) examine happiness and life outcomes including income. They find that people who experience the highest levels of happiness are the most successful in terms of close relationships and volunteer work, but that those who experience slightly lower levels of happiness are the most successful in terms of income, education, and political participation.

18. Implications for Investor Behavior
Research findings on the association between money and happiness have implications for investor behavior. Because of the limited direct research on money and happiness pertinent to investor behavior, the following is speculation.
The discussion focuses on how investors gain happiness when they engage in investment activities. Individual investors can be categorized in two broad categories: professional investors and nonexpert individual investors including novice and sophisticated investors.

19. Cont.
According to Dolan et al. (2011), the research literature often measures happiness in three ways: daily happiness, life satisfaction, and living a meaningful life. These measures are relevant to investors’ job satisfaction, career satisfaction, and socially responsible investing (SRI).
For professionals, their daily happiness level may be lower than that of people who are not in the investment industry because they have to work longer hours and have more pressure.
Professionals may also have a lower level of life satisfaction because they have limited time to spend with their family and friends due to highly demanding work.
The professional investors could live a meaningful life if they make a strong commitment to socially responsible investing and sacrifice monetary benefits when they face moral dilemmas at work.

20. Cont.
Some researchers examine SRI from a corporate perspective. For example, SRI may increase corporation values in a long term.
For amateur investors (i.e., nonexpert individual investors) to enjoy a happier life, they may need to limit their time investing so that they have adequate time to spend with their family and friends. They may also keep learning investment skills and methods to successfully achieve their investment goals. To be happy in a long term, investors may want to participate in SRI to make their spare time investing more meaningful.