Experienced versus Decision Utility of Income: Relative or Absolute Happiness

A central finding in happiness research is low correlations between income and happiness. This is paradoxical since most people seem to attach a high value to a rise in their income. The various versions of this paradox can be explained in terms of rising aspirations (Easterlin 2001) and positional externalities (Frank 1997). However, econometric/ statistical studies which test these explanations on the level of individual cross-sections are rare and have produced mixed results. A careful analysis of the results of such studies leads to the conclusion that there seems to be considerable support for the explanations mentioned. On the other hand, these explanations seem only partial and do not take into account top-down relations between life satisfaction and aspiration levels as implied by some studies. Therefore, an alternative explanation of the above paradox in terms of the intrinsic/extrinsic-goals distinction of Kasser and Ryan (1993) is investigated. This approach points to a second kind of discrepancy between decision utility and experienced utility of income and implies that life satisfaction depends on absolute rather than relative income. It has some potential, but, in its present stage, it yields less specific predictions with respect to the paradoxes than the theories of aspirations and positional externalities. On the other hand, in the case of top-down relations between life satisfaction and aspiration levels, the intrinsic/extrinsic-goals explanation seems more fundamental.