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09/25/2014

Behavioral Economics and the Relativity Theory of Happiness

Money UnhappyAccording to many traditional economic theories of human nature, higher income should make people happier. That’s because with every additional dollar we make, we can purchase goods that increase our “utility.” Or we can save more money, and reduce anxiety about our financial future.

But of course, once people have enough money to meet the basic necessities, the relationship between additional money and additional happiness gets more complicated. For instance, for many people with high incomes, how happy they are with their earnings depends on the size of their earnings compared to their peers.

Consider a banker who wrote an op-ed in the New York Times a while ago, complaining about his income:

“In my last year on Wall Street my bonus was $3.6 million — and I was angry because it wasn’t big enough.”

The problem of course isn’t the size of the bonus, but the size of his best friend’s bonus, or the size of the bonus he got the previous year.

Traditional economics still provides us with wonderful tools to understand human behavior. We just have to remember to reach into our toolbox for other insights into human nature, to better grasp how people think, decide and behave.

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