CEO of Gravity Payments Dan Price has received a wealth of media attention for his decision to cut down his salary from $1 million to $70,000. His salary cut has sparked widespread praise and has placed the wage equality question in the spotlight. Dan Price revealed that he received his inspiration from research conducted by two Princeton economists, Angus Deaton and Daniel Kahneman. In a work titled "High income improves evaluation of life but not emotional well-being", Deaton and Kahneman prompt a new understanding of the age-old question, does money buy happiness?
In their findings, Deaton and Kahneman report that, "household income matters for both emotional well-being and life evaluation, and that there are circumstances under which it matters for the latter when it does not matter for the former". As defined by Deaton and Kahneman, emotional well-being "refers to the emotional quality of an individual's everyday experience—the frequency and intensity of experiences of joy, fascination, anxiety, sadness, anger, and affection that make one's life pleasant or unpleasant." Life evaluation, on the other hand, "refers to a person's thoughts about his or her life", that is, a person's judgment on her or his life. Deaton and Kahneman argue that higher income contributes to individuals' life evaluation. They also argue that the effects of income on emotional well-being are fully satiated at an annual income of ~$75,000. Utilizing a new approach, Deaton and Kahneman demonstrate that the age-old question, "does money buy happiness", is much more nuanced than previous research might reveal.
Previous research has employed raw income against subjective well-being, a careless mistake, as Deaton and Kahneman argue, that can be corrected by using the logarithm of income. A logarithmic approach focuses on the evaluation of differences versus an absolute amount, in this case an absolute dollar amount. This logarithmic transformation reveals a new and perhaps surprising light on the statement that "money can't buy happiness".
Deaton and Kahneman show us that while more money does not necessarily buy more happiness, less money is associated with emotional pain. They demonstrate that income reaches a threshold beyond which emotional well-being does not improve, and below which emotional well-being worsens - they show us, in other words, that emotional well-being satiates with high income. One might say that money buys happiness up to a certain point, after which money does not buy more happiness. The research gets more interesting with regard to life evaluation - Deaton and Kahneman show us that life evaluation, or our judgment of our lives, does not satiate with high income. In other words, our judgement of our lives improves with high income. In summary, Deaton and Kahneman demonstrate that high income does not improve our emotional well-being, but high income does improve our evaluation of life, underscoring "the importance of the distinction between the judgments individuals make when they think about their life and the feelings that they experience as they live it."
Take a look at Deaton and Kahneman's findings here: http://www.pnas.org/content/107/38/16489.full