The relationship between money and happiness may be the most studied question in the economics of wellbeing, and it has generated one of the most misunderstood findings in all of social science. In 2010, two economists -- Daniel Kahneman and Angus Deaton -- published an analysis of Gallup survey data from 450,000 Americans and found what appeared to be a clean, headline-ready result: beyond about $75,000 a year, more money stopped making people happier. The study was widely cited, widely simplified, and widely misapplied. It suggested that financial striving above a comfortable threshold was futile from a wellbeing standpoint -- that the hedonic treadmill had a specific satiation point.
The story has since become considerably more complicated. A 2021 study by Matthew Killingsworth using a different methodology found no satiation point -- wellbeing continued rising with income straight through the range Kahneman and Deaton examined. The two teams subsequently collaborated to reconcile the discrepancy, producing a more nuanced picture in which the relationship between income and wellbeing is real and mostly continuous, but is heterogeneous: for a subset of already-unhappy people, income gains are indeed less effective at improving wellbeing. The headline has been revised, though the original version is still reproduced everywhere.
This episode illustrates something important about the money-happiness literature: it is richer, more contested, and more instructive than any single finding captures. The research illuminates not just what income contributes to wellbeing, but why it contributes less than expected, which forms of spending generate lasting versus transient satisfaction, what people actually mispredict about their future happiness, and why the broader societal question of income inequality may matter more for average wellbeing than aggregate economic growth.
"Money is a terrible master but an excellent servant." -- P.T. Barnum
Key Definitions
Hedonic Adaptation: The tendency of people to return to a baseline level of happiness after positive or negative life changes. Also called the 'hedonic treadmill.' Central to explaining why material gains produce only temporary wellbeing increases.
Easterlin Paradox: Richard Easterlin's 1974 observation that while richer individuals within a country report higher wellbeing, economic growth over time does not systematically increase national average wellbeing in already-developed nations.
Experiential Purchases: Spending on experiences (travel, concerts, dining, events) as distinct from material goods. Research by Gilovich finds experiential purchases produce more lasting and greater happiness, partly because they are more resistant to hedonic adaptation.
Affective Forecasting: The process of predicting how future events will make you feel. Research by Daniel Gilbert finds that people systematically overestimate the emotional impact of both positive and negative events, a phenomenon called 'impact bias.'
Relative Income: The hypothesis that happiness depends not on absolute income but on income relative to relevant others (neighbours, peers, social reference group). Central to the Easterlin paradox and 'keeping up with the Joneses' research.
Kahneman and Deaton: The Study That Launched a Thousand Caveats
The 2010 Kahneman and Deaton study remains the single most influential piece of research in the money-happiness literature, not despite its simplifications but partly because of them. Their Gallup data allowed them to distinguish between two types of wellbeing that researchers had increasingly recognised as partially independent: life evaluation (a reflective, cognitive judgement about how one's life is going overall) and experienced wellbeing (the moment-to-moment emotional quality of daily life, measured by asking people how they felt yesterday).
The distinction turns out to matter enormously. Life evaluation rose continuously with income, with no sign of satiation. Richer people consistently rated their lives more positively, and the relationship showed no clear ceiling. This is consistent with the common sense that more money provides more options, more security, and more of the markers that socially signal a good life.
Experienced wellbeing told a different story. Day-to-day emotional experience -- reports of positive affect, negative affect, stress, and sadness -- did not improve above roughly $75,000. Below that level, financial stress and its associated stressors (inability to pay bills, housing insecurity, healthcare inaccessibility) actively degraded emotional life. Above it, more money bought more things but not more felt happiness in daily experience.
Kahneman, who had already developed the concept of the 'focusing illusion' (the idea that nothing is as important as it is when you are thinking about it), suggested that wealthy people could purchase a satisfying life narrative, but were often too busy pursuing wealth to actually experience its benefits. The irony he pointed to: the pursuit of the income that would buy happiness consumed the attention and time that having it was supposed to make happier.
Killingsworth's Challenge and the Reconciliation
Matthew Killingsworth's 2021 study, published in the Proceedings of the National Academy of Sciences, used a smartphone app that sent participants random prompts throughout the day asking how they felt at that moment -- a purer measure of experienced wellbeing than the Gallup survey's retrospective self-reports. His sample of 33,391 employed Americans showed continuous improvement in experienced wellbeing across all income levels examined, with no satiation at $75,000 or anywhere else.
The apparent contradiction attracted significant attention, because the two studies were both methodologically careful and produced directly contradictory conclusions about experienced (as opposed to evaluative) wellbeing. Kahneman, to his credit, agreed to collaborate with Killingsworth to resolve the discrepancy. Their joint 2023 paper, published in the Proceedings of the National Academy of Sciences, found that both were partially correct through a mechanism of heterogeneity.
When they analysed the data jointly, they found that for approximately 80 percent of the sample, Killingsworth's result held: experienced wellbeing continued to improve with income at all levels. But for approximately 20 percent -- those who were already unhappy (scoring in the bottom third of the wellbeing distribution) -- higher income produced no additional improvement. For this subgroup, something other than income was driving their low wellbeing, and money was not the remedy.
This reconciliation has important practical implications. For most people, the relationship between income and day-to-day wellbeing is positive and does not appear to saturate within the ranges most people experience. Higher income genuinely helps. But income is not a universal solution to unhappiness: for people whose low wellbeing stems from relationship problems, mental health challenges, loss, or existential dissatisfaction, income gains are likely to be less effective than interventions targeting those specific drivers.
The Hedonic Treadmill: Why More Feels Like the Same
Philip Brickman and Donald Campbell introduced the concept of hedonic adaptation in 1971, proposing that people have a biological set point for happiness to which they return after both positive and negative life changes. Their most striking empirical demonstration came in a 1978 study comparing lottery winners, paraplegic and quadriplegic accident victims, and matched controls.
The findings were counterintuitive on both sides. Lottery winners were no happier than controls when assessed several months after their windfall, and their enjoyment of everyday pleasures was actually lower (they had adapted to a higher baseline of stimulation, making ordinary pleasures less savoury by comparison). Accident victims who had become paralysed were significantly less miserable than people predicted they would be, reporting levels of positive affect that surprised the researchers.
This adaptation process is the primary reason that material consumption reliably fails to produce lasting happiness gains. The hedonic boost from a new car, a larger house, or a smartphone upgrade is real but temporary. Within weeks to months, the new level of material circumstances becomes the new normal, and the person returns to their baseline emotional state -- now, however, needing a newer car, a still larger house, and a subsequent model to produce the same temporary elevation. The treadmill keeps moving; the position relative to it stays roughly constant.
Research by Richard Lucas and colleagues, using large-scale longitudinal German survey data, has found that people do not fully adapt to all life changes equally. Marriage produces initial wellbeing gains that mostly adapt within a few years. Unemployment produces large negative impacts that recover only partially and slowly. Disability shows more complete adaptation than predicted. The asymmetry between gains and losses in adaptation rate is consistent with the broader loss aversion literature and helps explain why hedonic adaptation is not symmetric.
Experiences vs. Things: The Spending Gap
One of the most practically useful findings in the money-happiness literature concerns not how much to spend but what to spend it on. Thomas Gilovich at Cornell University has produced a sustained research programme demonstrating that experiential purchases -- travel, concerts, theatre, dining, education, outdoor activities -- produce more lasting and greater wellbeing than material purchases of equivalent cost.
Several mechanisms operate in parallel. Experiences are less susceptible to hedonic adaptation than material goods: you cannot 'get used to' a memory in the way you acclimatise to a possession. The anticipation of an upcoming experience generates sustained positive affect in a way that anticipating the delivery of a material good does not. Experiences are more closely tied to social connection and identity: they are shared with others, become stories in social contexts, and are incorporated into personal narrative in ways that a material possession typically is not.
Experiences are also more resistant to the social comparison that undermines the wellbeing gains from material acquisitions. When your neighbour buys a better car, the hedonic value of your own car decreases through upward comparison. But when your neighbour takes a better holiday, the comparison is less aversive: experiences are inherently subjective and idiosyncratic, making them less suitable as direct status markers.
A related finding by Elizabeth Dunn, Lara Aknin, and Michael Norton, published in Science in 2008, found that spending money on others ('prosocial spending') produced more wellbeing than spending the same amount on oneself, across a range of incomes and across cultures. Even small acts of financial generosity -- giving as little as five dollars to someone else -- produced measurable wellbeing improvements in the giver. The mechanism appears to involve enhanced social connection and positive self-concept, both of which contribute to wellbeing independently of material circumstances.
Affective Forecasting: What We Get Wrong
A critical piece of context for the money-happiness debate is the research on affective forecasting -- the prediction of future emotional states. Daniel Gilbert at Harvard, with Timothy Wilson at Virginia, developed this research programme in the 1990s, finding that people are systematically poor at predicting how they will feel in the future, a set of errors they termed 'impact bias.'
People consistently overestimate the emotional impact of future events, both positive and negative. They predict that winning the lottery, getting the promotion, buying the house, or landing the partner will make them lastingly happier than it actually does -- and they predict that losing the job, ending the relationship, or failing the exam will make them lastingly more miserable than it does. The hedonic adaptation process that moderates the actual impact is not adequately incorporated into the prediction.
The implication for money and happiness is that people's anticipation of how wealthy they will feel when they earn more is systematically inflated. This fuelling of the hedonic treadmill -- working harder for rewards that will adapt quickly -- is a structural feature of the motivational architecture that makes the treadmill so difficult to exit. The person who knows intellectually that the next increment of income will not produce the expected happiness increase is working against deeply embedded motivational biases as well as social and institutional incentive structures.
The Easterlin Paradox and the Relative Income Hypothesis
Richard Easterlin's 1974 observation offered a macroeconomic angle on the money-happiness relationship that remains controversial and instructive. He noted a puzzling pattern: within any given country, richer people report higher wellbeing -- consistent with a simple money-happiness relationship. But across countries and over time, the relationship is much weaker. Countries with very similar income levels can have very different average wellbeing, and countries that have grown much richer over decades show surprisingly modest increases in average happiness.
His explanation, the relative income hypothesis, holds that what matters for wellbeing is not absolute income level but position in the income distribution relative to relevant others. When a whole society gets richer together, the relative position of most individuals barely changes. The person who was middle-income is still middle-income; the status signal of their income relative to their reference group is unchanged. Only increases in relative standing produce sustained wellbeing gains.
The Easterlin paradox has been contested empirically, particularly by Angus Deaton and Justin Wolfers, who find positive cross-national relationships between GDP per capita and average life satisfaction. The debate involves methodological differences in how countries are compared and how wellbeing is measured. But the core insight of the relative income hypothesis -- that social comparison and status are significant drivers of the subjective experience of wealth -- is supported by experimental and observational research regardless of how the macroeconomic data is interpreted.
What Actually Predicts Happiness
If income alone is an incomplete predictor of wellbeing, what does predict it reliably? The research points to several factors that consistently explain more variance in wellbeing than income does.
Social relationships are the strongest and most consistent predictor of life satisfaction and emotional wellbeing across studies and cultures. Quality matters more than quantity: one close, reciprocal, trusting relationship is more valuable than many superficial ones. The Harvard Study of Adult Development, now over 80 years old and the longest longitudinal study of adult life in existence, has found that the quality of relationships at age 50 is the single best predictor of health and happiness at age 80 -- more predictive than cholesterol, social class, or health behaviours.
Autonomy and sense of control over one's own life are also strongly predictive. The Whitehall studies found that job control explained a significant portion of the social gradient in health; experimental research by Martin Seligman established that perceived lack of control produces learned helplessness and depressive behaviour. People who feel that they are directing their own lives report substantially higher wellbeing than those who feel controlled by external forces.
Meaning and purpose -- the sense that what one does matters and connects to something beyond oneself -- is an independent predictor of wellbeing that is partially separable from moment-to-moment pleasant affect. Viktor Frankl's observation from his experiences in concentration camps that people who retained a sense of purpose showed greater psychological resilience has been formalised in Martin Seligman's PERMA model and the broader literature on eudaimonic (meaning-based) versus hedonic (pleasure-based) wellbeing.
Practical Takeaways
The money-happiness literature's practical lessons are more actionable than its complexities suggest. Income below a level of basic security reliably degrades wellbeing, making poverty reduction the highest-return intervention at the societal level. Above basic security, the relationship continues but with diminishing emotional returns; the goal of pursuing income indefinitely is likely to consume the time, energy, and relational investment that more directly produce wellbeing.
Spending on experiences rather than material goods, and on others rather than exclusively on oneself, shifts the hedonic profile of consumption toward longer-lasting and more robust wellbeing gains. Recognising affective forecasting errors -- the systematic overestimation of income-related happiness gains -- may reduce the motivational pull of endless acquisition. And attending to the non-monetary determinants of wellbeing -- relationships, autonomy, purpose, health -- produces more reliable and durable returns than equivalent investment in income growth alone.
References
- Kahneman, D., & Deaton, A. (2010). High income improves evaluation of life but not emotional well-being. Proceedings of the National Academy of Sciences, 107(38), 16489-16493.
- Killingsworth, M. A. (2021). Experienced well-being rises with income, even above $75,000 per year. Proceedings of the National Academy of Sciences, 118(4), e2016976118.
- Killingsworth, M. A., Kahneman, D., & Mellers, B. (2023). Income and emotional well-being: A conflict resolved. Proceedings of the National Academy of Sciences, 120(10), e2208661120.
- Brickman, P., Coates, D., & Janoff-Bulman, R. (1978). Lottery winners and accident victims: Is happiness relative? Journal of Personality and Social Psychology, 36(8), 917-927.
- Easterlin, R. A. (1974). Does economic growth improve the human lot? Some empirical evidence. In P. A. David & M. W. Reder (Eds.), Nations and Households in Economic Growth. Academic Press.
- Gilovich, T., Kumar, A., & Jampol, L. (2015). A wonderful life: Experiential consumption and the pursuit of happiness. Journal of Consumer Psychology, 25(1), 152-165.
- Dunn, E. W., Aknin, L. B., & Norton, M. I. (2008). Spending money on others promotes happiness. Science, 319(5870), 1687-1688.
- Gilbert, D. T., & Wilson, T. D. (2007). Prospection: Experiencing the future. Science, 317(5843), 1351-1354.
- Lucas, R. E., Clark, A. E., Georgellis, Y., & Diener, E. (2004). Unemployment alters the set point for life satisfaction. Psychological Science, 15(1), 8-13.
- Vaillant, G. E. (2012). Triumphs of Experience: The Men of the Harvard Grant Study. Belknap Press.
- Seligman, M. E. P. (2011). Flourish: A Visionary New Understanding of Happiness and Well-Being. Free Press.
- Deaton, A. (2008). Income, health, and well-being around the world: Evidence from the Gallup World Poll. Journal of Economic Perspectives, 22(2), 53-72.
Frequently Asked Questions
What did the famous Kahneman and Deaton study find about income and happiness?
In a 2010 paper published in the Proceedings of the National Academy of Sciences, Daniel Kahneman and Angus Deaton analysed Gallup survey data from 450,000 Americans and found two distinct patterns. Life evaluation (how satisfied people were with their lives overall) rose continuously with income. But emotional wellbeing (how people felt on a day-to-day basis, measured by experience sampling of positive affect, negative affect, and stress) plateaued at around \(75,000 annual income. Above that threshold, more money did not produce measurable improvements in daily emotional experience. The finding suggested that while wealth could provide a narrative of success, it could not purchase more moment-to-moment happiness beyond a certain level. The \)75,000 figure -- roughly the median household income in the US at the time -- captured enormous public attention and became one of the most quoted statistics in popular psychology.
Did Matthew Killingsworth's 2021 study overturn the $75k finding?
Killingsworth's 2021 study, published in the Proceedings of the National Academy of Sciences, used a smartphone experience-sampling app ('Track Your Happiness') with 33,391 employed US adults and found that both experienced wellbeing and evaluative wellbeing rose continuously with income, with no plateau or satiation point visible even at incomes well above $75,000. This appeared to directly contradict Kahneman and Deaton's threshold finding. The two research teams subsequently collaborated, publishing a 2023 paper in which they reconciled the discrepancy: Killingsworth's continuous relationship was broadly correct, but the pattern was heterogeneous. For most people, wellbeing continued to rise with income at all levels. But for approximately 20 percent of the sample -- those who were already unhappy for reasons unrelated to income -- higher incomes did not improve wellbeing. The interaction between income and prior unhappiness explained the apparent discrepancy between the two studies.
What is hedonic adaptation and how does it affect the money-happiness relationship?
Hedonic adaptation, sometimes called the 'hedonic treadmill,' refers to the tendency of humans to return to a relatively stable level of happiness after significant positive or negative life changes. Research by Philip Brickman and Donald Campbell in 1971, followed by Brickman's landmark 1978 study of lottery winners and accident victims, found that lottery winners were no happier than controls several months after their windfall, while accident victims who had lost limbs were significantly less miserable than people predicted. Adaptation explains why material acquisitions reliably fail to produce lasting increases in happiness: the hedonic boost from a new car, house, or gadget fades within months as the new level of material circumstances becomes the new normal. Income-based approaches to wellbeing are therefore less effective than they appear, because the adaptation process erodes most of the gain.
Do experiences make people happier than material purchases?
Research by Thomas Gilovich and colleagues at Cornell University has found consistent support for the proposition that experiential purchases (travel, concerts, dining, education) produce more lasting and greater happiness than material purchases of equivalent cost. Several mechanisms explain this. Experiences adapt more slowly than material goods: it is difficult to 'get used to' a memory in the same way you get used to a car. Experiences are more closely tied to identity and social connection -- they become part of your personal narrative and generate social capital through sharing. Material goods invite direct social comparison (my car versus yours); experiences are more resistant to comparison because they are inherently subjective. And anticipation of experiences provides more sustained hedonic value than anticipation of material goods. These findings suggest that the way you spend money matters at least as much as how much you have to spend.
What does the Easterlin paradox say about national income and happiness?
Richard Easterlin's 1974 observation, known as the Easterlin paradox, noted that while within a given country at any point in time, richer people are happier than poorer people, comparisons across countries and across time show a more complicated picture. Economic growth over decades does not systematically increase average happiness in developed nations: the United States, Japan, and other wealthy countries showed minimal improvements in average life satisfaction despite dramatic increases in GDP per capita over the latter half of the twentieth century. Easterlin's explanation centres on relative income: what matters for happiness is not absolute material standard but position relative to others. As a society gets richer together, the relative position of individuals barely changes, and happiness gains are limited. This paradox has been contested, particularly by Angus Deaton and Justin Wolfers who find positive relationships between GDP and wellbeing in cross-national data, but the debate has productive implications for policy: if relative position matters, reducing inequality may do more for aggregate wellbeing than raising average income.