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IESE Research Papers,
IESE Business School

No D/683: Does more money buy you more happiness?

Manel Baucells () and Rakesh K. Sarin
Additional contact information
Manel Baucells: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Rakesh K. Sarin: UCLA Anderson School of Management

Abstract: Why do we believe that more money will buy us more happiness (when in fact it does not)? In this paper, 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, that is, 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 adaptive goods.

Keywords: Happiness; Life Satisfaction; Social Comparison; Consumer Life-Cycle Planning; Projection Bias

28 pages, February 14, 2007

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