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Why does happiness respond differently to an increase vs. decrease in income?

Authors :
Easterlin, Richard A.
Source :
Journal of Economic Behavior & Organization. May2023, Vol. 209, p200-204. 5p.
Publication Year :
2023

Abstract

The answer is that people's evaluations of their income situation are based on different considerations when the economy is expanding and when it is contracting. When, in the course of economic growth, incomes generally are rising, evaluations of one's own income—whether it is satisfactory –tend to be dominated by comparisons with the incomes of others—by "social comparison". If one's income is just "keeping up with the Joneses", happiness is unchanged. But in a recession, as incomes decline and people increasingly have difficulty satisfying consumption habits and fixed financial obligations acquired when incomes were higher, the benchmark for income evaluations shifts to comparisons with one's past experience– how current income compares with one's previous peak income. The greater the shortfall, the less one's happiness. The shift when income declines, from comparison with others to comparison with one's past experience, is typically forced on individuals by the growing pressure of meeting fixed financial obligations. There is thus an asymmetry in the psychological roots of income evaluations when income is rising vs. falling, and this causes a corresponding asymmetry in the response of happiness to income change. When income is rising and social comparison is the basis for evaluating one's income situation, changes in income have, on average, a nil effect on happiness. When income falls below its previous peak and past personal experience is the basis for evaluating one's income situation, happiness goes down and up with income. [ABSTRACT FROM AUTHOR]

Details

Language :
English
ISSN :
01672681
Volume :
209
Database :
Academic Search Index
Journal :
Journal of Economic Behavior & Organization
Publication Type :
Academic Journal
Accession number :
163390064
Full Text :
https://doi.org/10.1016/j.jebo.2023.03.005