Does More Money Buy You More Happiness?

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 accounted for the dynamics of these factors would indeed buy more happiness with money. We argue that projection bias, the tendency to project our current reference levels into the future, 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 their consumption budget by consuming too much at the beginning of the planning horizon, or consuming too many adaptive goods. * Professor of Managerial Decision Sciences, IESE. ** Professor of Decisions, Operations & Technology Management, UCLA Anderson School of Management.