Money and happiness revisited

• A. Money has a strong, linear relationship with happiness at every income level
• B. Money strongly boosts happiness at low incomes, but its effect diminishes as income rises ✓
• C. Money has no measurable relationship with happiness at any income level
• D. Happiness only increases when income doubles every year

Why: Research consistently shows that increases in income have a larger impact on well-being at lower income levels, with diminishing returns as incomes grow higher. Meeting basic needs such as security, housing, and food contributes greatly to happiness, but additional income matters less once those needs are comfortably met.

• A. A fitness routine that helps people earn more money
• B. The tendency for people to quickly adapt to improved circumstances, returning to a baseline level of happiness ✓
• C. A financial strategy for investing in exercise equipment
• D. The process by which wealthy people lose interest in material goods

Why: The hedonic treadmill describes how people adapt to positive changes, such as a raise or a new possession, so that the boost in happiness fades over time. People then need ever-increasing gains to feel the same level of satisfaction.

• A. Buying material possessions produces longer-lasting happiness than buying experiences
• B. Spending money on experiences tends to bring more lasting happiness than spending on material goods ✓
• C. Spending money on other people reduces happiness in nearly every case
• D. Happiness from spending is unrelated to how the money is used

Why: Studies by researchers such as Thomas Gilovich suggest experiences often provide greater lasting satisfaction than material purchases, partly because experiences are more central to identity, more social, and less subject to comparison and adaptation.

• A. Measuring your savings against a government benchmark
• B. Judging your own income and possessions relative to others, which can reduce satisfaction even when your absolute situation improves ✓
• C. Comparing the prices of different stores before making a purchase
• D. Competing with coworkers for promotions based on salary

Why: Social comparison means evaluating ourselves against those around us. Even if your income rises, you may feel less satisfied if peers earn more, which is one reason money's effect on happiness is weaker than people expect.

• A. Money has no value and should be ignored entirely
• B. Once basic needs are met, factors like relationships, health, autonomy, and purpose usually have a bigger influence on well-being ✓
• C. Wealthy people are always less happy than poor people
• D. Happiness depends almost entirely on genetics and cannot be influenced at all

Why: Money contributes to well-being mainly by reducing stress and meeting needs. Beyond that point, strong relationships, good health, a sense of control over one's life, and meaningful goals tend to shape happiness more than additional income does.

• A. Emotional well-being rises steadily with income without any upper limit
• B. Emotional well-being rises with income up to roughly $75,000 per year and then plateaus ✓
• C. Income has no measurable relationship with emotional well-being at any level
• D. Emotional well-being peaks at low incomes and declines as income increases

Why: Kahneman and Deaton's 2010 study using Gallup data found that life evaluation (overall life satisfaction) continued to rise with income, but emotional well-being (daily experiences like joy and stress) leveled off at about $75,000 per year in the U.S. at that time. Later work by Killingsworth (2021) challenged the plateau, suggesting the relationship continues for some people.

• A. A graph showing that happiness always increases in a straight line with wealth
• B. A pattern where life satisfaction or happiness rises with income, then flattens or levels off at higher incomes ✓
• C. A curve showing that people become happier as they grow older regardless of income
• D. A chart showing the decline in happiness during economic recessions

Why: The happiness curve describes the pattern in which well-being increases with income at lower levels, with diminishing returns at higher levels, so the gains from each additional dollar get smaller. This reflects the idea that basic needs and financial security matter most at low incomes.

• A. Hedonic adaptation
• B. Diminishing marginal utility ✓
• C. Social comparison theory
• D. Confirmation bias

Why: Diminishing marginal utility holds that each additional unit of a good provides less additional satisfaction than the previous one. For someone struggling to pay rent, $1,000 can relieve serious stress, whereas for a high earner the same amount adds little to their overall well-being.

• A. Comparisons make people less aware of their own finances
• B. People tend to judge their own income relative to peers, so rising reference groups can keep satisfaction low ✓
• C. Higher income always reduces the ability to enjoy leisure time
• D. Social comparison only affects people with low incomes

Why: Relative income matters. When people measure their success against those around them, a rising average income in their community can make their own income feel inadequate, which reduces the satisfaction that higher pay would otherwise bring.

• A. Money has no effect on happiness whatsoever
• B. Money can improve well-being, especially by meeting basic needs and reducing financial stress, though its effect diminishes at higher incomes ✓
• C. Only wealthy people can experience happiness
• D. More money always produces proportionally more happiness

Why: Research generally shows that money helps well-being, particularly by reducing poverty, financial strain, and insecurity. However, the benefits tend to shrink as income rises, and how money is spent and how people relate to others also shapes its impact on happiness.

• A. Material possessions such as clothing and electronics
• B. Experiences such as travel, concerts, and shared meals ✓
• C. Luxury status items such as designer watches
• D. Household upgrades such as new furniture

Why: Studies by researchers such as Thomas Gilovich have found that experiential purchases generally bring more lasting happiness than material purchases, partly because experiences are more central to identity and less subject to comparison and adaptation.

• A. The tendency to save more money as income rises
• B. The tendency to quickly return to a baseline level of happiness after a positive change ✓
• C. The tendency to spend money on others rather than oneself
• D. The tendency to overestimate the cost of experiences

Why: Hedonic adaptation describes how people quickly get used to new possessions, so the initial excitement fades. Experiences are less prone to this effect, though not immune to it.

• A. Experiences are always free of cost
• B. Experiences are unique and harder to directly compare with others' experiences ✓
• C. Experiences are never shared with other people
• D. Experiences are regulated by government standards

Why: Material goods are easy to compare on visible features like brand or price, while experiences are more subjective and personal, making direct comparison less likely and reducing envy.

• A. Buying a new smartphone
• B. Taking a cooking class with a friend ✓
• C. Purchasing a new car
• D. Buying a large flat-screen television

Why: A cooking class is an experience involving time, learning, and often social connection. The other options are material possessions.

• A. Sunk cost fallacy
• B. Anchoring bias
• C. Impact bias, or affective forecasting error ✓
• D. Confirmation bias

Why: Affective forecasting errors, including impact bias, cause people to overestimate how intensely and how long they will feel happiness from purchases, which can lead them to favor things over experiences that would bring more lasting joy.

• A. Having the highest possible income regardless of hours worked
• B. Feeling that you have enough discretionary time to do what you want
• C. Working as many hours as possible to build savings
• D. Maintaining a packed daily schedule of productive activities

• A. Having a large inheritance that allows early retirement
• B. The subjective sense of having abundant free time relative to one's obligations
• C. Earning a salary that is higher than the average in your industry
• D. The ability to outsource all household chores to paid services

• A. High earners always have poorer physical health
• B. Time pressure and constant obligation can reduce enjoyment and increase stress, offsetting financial gains
• C. Moderate earners always save more money for the future
• D. Free time has no measurable effect on happiness

• A. Purchasing the newest electronic devices as they are released
• B. Paying for services like cleaning or grocery delivery that free up hours
• C. Buying luxury goods to display social status
• D. Accumulating larger homes with more rooms to maintain

• A. Earning so little that you cannot afford basic necessities
• B. Feeling constantly rushed, which can make people undervalue experiences and relationships that bring lasting happiness
• C. Spending too much time shopping for bargains
• D. Being unable to find a job that pays well enough to support a family

• A. The tendency for people to become permanently happier after a major financial windfall
• B. The tendency for people to quickly return to a baseline level of happiness after gaining or losing something, including income ✓
• C. The physical exercise routines people adopt to manage stress from financial pressure
• D. The pattern in which wealthy people consistently report higher life satisfaction than everyone else

Why: The hedonic treadmill describes how people adapt to changes in circumstances, so gains like a raise produce a temporary boost in happiness before they return to a baseline level.

• A. A person's income measured in absolute dollars regardless of others
• B. A person's income compared to the incomes of others in their reference group ✓
• C. Income that is shared among family members
• D. Income adjusted for inflation over time

Why: Relative income concerns how one's earnings stack up against peers, neighbors, or colleagues, and studies suggest satisfaction often depends more on this comparison than on absolute amounts.

• A. A feeling of pleasure at a friend's success
• B. A painful emotion arising when someone lacks something another person has and desires it ✓
• C. A motivation to save money for future security
• D. A form of gratitude for what one already owns

Why: Envy is the unpleasant feeling triggered by comparing oneself to someone who has more of something valued, and it can reduce well-being even when one's own situation has objectively improved.

• A. Because raises always reduce overall income
• B. Because satisfaction depends partly on relative standing, so the comparison lowers the perceived value of their own raise ✓
• C. Because coworkers always resent any salary increase
• D. Because raises are taxed at higher rates when others also receive them

Why: When people judge their pay against peers, a gain can feel smaller or even disappointing if others gained more, showing how comparison shapes the emotional impact of money.

• A. Buying the same item repeatedly because it never loses its appeal
• B. Getting used to a new possession so that it no longer provides the same level of pleasure ✓
• C. Changing one's spending habits every time prices rise
• D. Learning to earn more money through skill development

Why: Adaptation means that new purchases, like a bigger house or faster car, gradually stop feeling exciting as they become ordinary, which is a core mechanism behind the hedonic treadmill.

• A. Spending on luxury personal items
• B. Spending money on other people ✓
• C. Saving money for an unspecified future
• D. Paying off credit card debt as quickly as possible

Why: In a well-known 2008 study, Dunn, Aknin, and Norton found that participants who spent money on others reported greater happiness than those who spent the same amount on themselves. Prosocial spending tends to strengthen relationships and create a sense of meaning.

• A. Schadenfreude
• B. Hedonic adaptation
• C. Warm glow ✓
• D. Cognitive dissonance

Why: The 'warm glow' effect, described by economist James Andreoni, refers to the satisfaction people feel from giving. It suggests that generosity can be motivated partly by the good feelings it produces in the giver, not only by altruism toward recipients.

• A. Giving anonymously so no one knows about it
• B. Giving to causes you feel connected to and seeing the impact of your gift ✓
• C. Giving only when you have a large surplus of money
• D. Giving in small amounts to many different causes at once

Why: Studies suggest that feeling a connection to the cause and understanding the impact of one's contribution increases the sense of meaning and satisfaction. Knowing how a gift helps makes the generosity feel more tangible and rewarding.

• A. Wealthier people never experience any benefit from giving
• B. Once basic needs are met, additional spending on others may matter more to happiness than additional personal spending ✓
• C. Giving only makes people happy when they donate more than 50 percent of their income
• D. Poorer people are always happier when they give money away

Why: Research suggests that the relationship between income and happiness levels off after basic needs are secure. At that point, how money is spent, particularly on others, plays a larger role in well-being than the total amount of money owned.

• A. Spending money to gain social status among peers
• B. Spending money to benefit others or society ✓
• C. Spending money on social media subscriptions
• D. Spending money on expensive dinners with friends for personal enjoyment

Why: Prosocial spending means using money to benefit others, such as gifts, donations, or helping someone in need. It is central to research on generosity and happiness because it connects personal resources to positive social outcomes.

• A. Total net worth
• B. Spending money on experiences rather than possessions ✓
• C. Owning a home outright
• D. Earning a high annual salary regardless of how it is spent

Why: Studies consistently find that experiential purchases, such as travel, classes, and shared activities, tend to produce more lasting satisfaction than material possessions, partly because experiences are more central to identity and social connection and are less subject to rapid adaptation.

• A. A fitness routine that boosts income
• B. The tendency to quickly adapt to a higher income or new purchases, returning to a baseline level of happiness ✓
• C. A savings strategy that automatically invests surplus cash
• D. The cycle of debt caused by credit card spending

Why: The hedonic treadmill describes how people adapt to improvements in their circumstances, so raises and new possessions give a temporary boost that fades as expectations rise to match the new level.

• A. Spending on yourself for personal luxuries
• B. Spending on bills and debt payments
• C. Spending money on others or on social connection ✓
• D. Keeping all money in a checking account

Why: Dunn and colleagues found that prosocial spending, such as giving gifts or donating to others, was linked to higher happiness, even among people with modest incomes, because it strengthens relationships and a sense of purpose.

• A. Higher income always leads to higher taxes that cancel out the gain
• B. People adapt to the new standard of living and their expectations rise accordingly ✓
• C. Money cannot influence mood in any way
• D. Income increases only affect people who already have high savings

Why: Expectations and spending tend to rise with income, a process called lifestyle creep, so the sense of relative comfort stays similar. Happiness gains depend more on whether the money changes daily experiences and reduces stress.

• A. Maximizing savings at the expense of all current spending
• B. Identifying your core values and directing spending toward what supports them, such as time, relationships, and health ✓
• C. Following the spending habits of friends and neighbors
• D. Avoiding all purchases that are not strictly necessary

Why: Aligning money with values helps ensure spending supports what matters most to you. Happiness research suggests that intentional choices about time, relationships, and experiences matter more than simply accumulating money or copying others.