Psychology and Higher Income Levels Essay

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Psychology and Higher Income Levels Essay

Psychology and Higher Income Levels Essay

This condition generally interferes with the functioning of an individual where an individual is faced with an overwhelming urge to shop. Signs include; someone being overly preoccupied with shopping (shop till you drop), excessive shopping of especially items that are not used, which eventually leads to debts, marital problems with the spouse, or even other family members such as parents. Other signs include; thinking excessively about money, feeling a rush of euphoria and anxiety when shopping, and ultimately lying about purchases made. Psychology and Higher Income Levels Essay

Happiness, as a generally accepted goal, has been viewed as a ‘social indicator’. Drawing on economics and psychology, relationship between income and happiness has been researched in the ways of data analysis and behaviour observer. It is evident that relative income is one of the important factors. This factor will affect happiness. Compared to actual income, relative income might affect happiness more. Based on these research findings, action can be recommended. That is, in individual consumption and investment activities, people should recognize the effects of relative income, especially, personal strive and relevant psychological adjustment are needed to improve individual happiness. Psychology and Higher Income Levels Essay


Over the past 50 years, in spite of the extraordinary success in producing material and accumulating wealth, happiness seems have not to be improved at the same level (Layard, 2011). The value of an extra dollar seems also become smaller and smaller as people become richer. In the process of accumulating wealth, increasing investment may not contribute more income. This may lead investor to feel frustration, affect their following investment performance, so that affect their happiness. In this situation, following investment performance means relative income, it is defined as the income compared to other similar social group or to oneself in the past (Ball & Chernova, 2008). Happiness refers to the human experience which is good (a psychological statement). This was first summarised by a leading economists Layard in 2005(Layard, 2011). Psychology and Higher Income Levels Essay

Based on these relevant researches, this essay aims to explain the reason of these phenomena. First, give evidence of relative income affects happiness. Second is the explanation why relative income affects happiness more than absolute income. Finally, try to recommend increasing relative income actions, so as to improve happiness effectively. In addition, the implications of individual financial decision and limitations of research methods will also be presented in the conclusion section.

First evidence, relative income affect happiness

There are many persuasive reasons for relative income affect happiness, which has been explained in both theoretical and empirical directions. Psychology and Higher Income Levels Essay

To begin with, theoretical economists Layard (2011) explained happiness is feeling good. He clearly pointed out the relationship between income and happiness. In his theoretical framework, he concluded ‘the big seven’ factors affect happiness. Those are: family relationships, financial situation, work, communication and friends, health, personal freedom, as well as personal value. In the seven factors, in the important order, financial situation and work are the first two factors directly correlated with income. So, undoubtedly, as the most important factor, income affects happiness directly. For example, developing country, like India, Mexico, Brazil and South Korea, their average happiness have risen because of economic growth and income increase. Psychology and Higher Income Levels Essay

Another empirical report was presented by Ball and Chernova in 2008. In order to identify the different impacts on happiness, Ball and Chernova (2008) stated that income can be separated into absolute income and relative income. They explained ‘absolute income means actual income in a certain period, relative income may be evaluated relative to others or to oneself in the past’. Based on the analyses of 20,771 samples, the noticeable relationship between absolute income and happiness can be found, and perceptible correlated relationship between relative income and happiness can also be noticed. Psychology and Higher Income Levels Essay

For example, if student of Reading University plan to go to town center, one person’s return ticket cost must be ?3.6 normally. However, if the student purchase group ticket with other three students together, one person’s ticket cost will become ?1.2. The student may realize the plan to go to town center while saved money is ?2.4. Compared with other students who buy normal return ticket, the outcome of commuting is the same. As the student’s former budget is ?3.6, saved money ?2.4 can be viewed as his relative income, this unexpected income must make the student feeling good, in other words, affects the happiness positively. The implication is, when compared with similar social group, generated relative income in rational consumption activities affect happiness effectively, even if the absolute income may not be changed.

Further evidence, relative income might affect happiness more

Relative income affects happiness more than absolute income. Further evidence has been showed in many researchers’ report. These obvious effects can be found both in group comparison and individual level. Psychology and Higher Income Levels Essay

First, Mackerron (2012), an advocate of Layard, implied more argument between income and happiness. He argued that the terms ‘happiness’ and ‘wellbeing’ can be used interchangeably, so as to communicate effectively with individuals or policy maker. He described absolute income as ‘individual income or household income’, which discussion in the literature seems to be unnecessary. But, in his views, there is a visible trend that relative income’s contribution on happiness has been neglected, because absolute income’s effects on happiness has been emphasised more.

Moreover, in one country, strong evidence have also been found by Clark, Frijters and Shields in 2008. That is effects on happiness which caused by the changed individual income are far more than the one caused by the aggregate level. Figure 1 showed the relationship between income and happiness at the individual and the aggregate level. The hypothesis of their model is happiness equal to utility. In economic, the term ‘utility’ refers to maximize something, outcome or wealth. The collected data described the increasing happiness of the same group in three periods. The three short curves refer to group level in three periods. The dots stand for the individual level. It is clear that the level of most personal data is higher than the group level. This model powerfully demonstrated that changes in individual income have larger effects on happiness than the aggregate level. In other words, to increase relative income affects happiness more.Psychology and Higher Income Levels Essay

Figure1. The relationship between income and happiness at the individual and the aggregate level (Clark, Frijters & Shields, 2008)

Another interesting example comes from Layard’s book (2011, p40). That is a scenario of office. One staff is talking with the leader. Another staff sits there. The picture was accompanied with text ‘O.K., if you can’t see your way to giving me a pay raise, how about giving Parkerson a pay cut?’ (2011, p40). This example revealed the difference of relative income will bring more happiness to people, even though it is impossible to increase absolute income. Accordingly, it also revealed that the main reason of social comparison: The human jealousy and greed. The leading economist Layard (2011) presented a dialectical thinking to this example.

He thinks the struggle for relative income is self-defeating at the level of whole society. If one person’s income rises, other person’s income will fall accordingly, the amount must be the same ones. This feature will imply the policy-maker’ devotion to increasing public relative income compared with the past, rather than to increase individual relative income simply. But, individual will remain benefit from the group increase of relative income, so that improve happiness as a member of the group. Psychology and Higher Income Levels Essay

These kind of social interaction behaviour connected with relative income bilaterally, it’s analysis and measurement can be found by mental account measurement in behavioural finance.

Applying mental account measurement to increase relative income will be helpful to improve happiness

It is possible to use mental account measurement to improve happiness in consumption and investment activities. As a recommended action plan, it is beneficial for people to isolate risks, pursue potential relative income, so, it can improve happiness. In fact, the key aspects of this action must be personal strive and relevant psychological adjustment. Psychology and Higher Income Levels Essay

In recent 10 years, behavioural finance studies how people actually behave in financial decision (Nofsinger, 2014, p181). That is to say, how psychological affect investor’s relative income and happiness. Just as mentioned group ticket, investor may feel good if they obtain unexpected investment performance in their investment activities. This means people may be used to separate their behavioural outcome into invisible different baskets in mind, and evaluated them separately. So, mental account can be described as different baskets in mind, classified different outcome of different activities, not only consumption activities but also investment activities. Thus, so called ‘mental account’ may be used to manage consumption and investment activities in an effective way.

Nofsinger (2014) explains the mental account as a process to store and keep track of important decisions and outcomes. Statman (2014) named the mental account as layers in a portfolio pyramid. It is commonly referred to mental accounting ‘buckets.’ This layer pyramid will help to isolate risk in different directions. He analyse that one mental account might be a ‘downside protection’ mental account, which is designed for protection from poverty. Another might be an ‘upside potential’ mental account, designed for a chance at riches. Investors might behave as if they are risk-averse in the downside protection mental account, when risk is measured at a certain level. Conversely, investors also might act as if they are risk-seeking in the upside potential mental account, when risk is measured by expected high returns. In short, lower risk, lower return, higher risk, higher returns.Psychology and Higher Income Levels Essay

In order to generate relative income, people should also understand and overcome psychological bias when managing mental account. According to Layard (2011), a famous statement about human nature in investment activities is loss-aversion and risk hating. As can be seen, people always hate a loss more than they value an equal gain. On average, if someone loses ?100, his mood worsens twice much as it would improve if he gained ?100. In other words, people tend to win double gains which could be supplemented their lost when people involved financial decisions.

In today’s world without exception everyone wants a happy and fulfilling life. The people around us, the society which we belong and even media tells us daily that the only way to reach a happy and fulfilling life is to have a higher income. But, is it true? Firstly we have to examine the meaning of happiness. Most commonly, happiness is known as a state of mind or feeling characterized by contentment, love, satisfaction, pleasure, or joy. For years, a great amount of researches have been done to answer this question. In this investigation, while some of researchers are supporting that attaining wealth and possessions is good for us, on the other hand some people are saying it is not. For example, In “The High Price Of Materialism” Tim Kasser says, No matter how many fancy designer clothes, cars, or jewels they might obtain, no matter how big their house or how up-to-date their electronic equipment, the lost opportunity to engage in pleasurable activities and enjoy each others’ companionship will work against need satisfaction, and thus against their happiness. Annie Leonard also supports her idea through her video about consumerism and happiness. In this video the most important thing missed is people and their satisfaction. And again Juliet Schor claims that with statics “National income has been rising for the last 20 years, but measures of the quality of life and happiness have fallen”. Although all of these statements prove that happiness doesn’t come from wealth and possessions, according to Peter Saunder’s “Why Capitalism is Good for The soul”, In some companies when workers start to get more profit, it results in higher living standards for workers as well as cheaper and more plentiful goods and services. And this improvement leads to a good life for workers. “Although without money and wealth life seems difficult, too much focusing on the possessions affects our mental health, self-control and satisfaction badly as well as damages our relationships and lead to unhappiness.Psychology and Higher Income Levels Essay

Happiness is the most valuable aim of human being. While the earth is getting complicated and changing day by day, almost all people are trying to have a happy and fulfilling life. During this pursuit of happiness, our relationships play a crucial role. In pace of life, when we have encountered with some stressful or disappointing situation or cases, in order to take a breath we always consult our families and fly into our family’s arms. If we have our own families and their real support, it is the most reliable way to reach the happiness and relief. But sometimes people can be in a dilemma between possessions and relationships. This is the point of collapsing real happiness, because when the passion of money comes to a person, he starts to abandon his family. He thinks as if money will bring them happiness and good life. But it won’t. As Tim Kasser says in the article of Mixed Messages “a focus on materialistic values detracts from well-being and happiness. For example when spouses spend most of their time working to make money, they neglect opportunities to be with each other and do what most interests them.” And again in Downshifting in Britain

“Difficulties in managing work-life balance can have a detrimental impact on the quality of the relationships between parents and children and the parent’s responsiveness to the child, with implications for child outcomes. This is particularly important for every young children, with evidence suggesting that it is best for children if they can receive intensive parental contact for the first months(HM Treasury & DTI 2003, p 13-14).”

As you can see in these sentences as long as people don’t allocate enough time for their families, there is no way to make them happy.Psychology and Higher Income Levels Essay

The same situation is also acceptable for people’s friends. Friends are known as a second family; even for some people they are the first. A friend can help us in every tough situation, they can back up us in everywhere. So always we want to have a good friend. If we select and take care of our friends carefully, as well as we have to be careful to maintain our relationships with them. The money, possessions, wealth shouldn’t be our friends. While we are establishing a friendship, it mustn’t be based on materialistic values or we mustn’t let money to interfere our friendship. When money comes, it might hurt our friends and us. Furthermore, if we look at the richest people in the world, we see that the loneliest people are these rich people because of money. According to lots of people, money means high status, greedy and responsibility. With these prejudices, rich people cannot make friends easily, by this way they can’t be happy. We associate this situation with food pyramid, if assume that there are richest people at the top of chain, and the chain is getting narrowed with the rate of friends, so if we are at the top of the pyramid we won’t have friends who makes us more and more happy. To give an example, John Jacob Astor 3 bemoans,” money brings me nothing but a certain dull anxiety.” So even if you have too much money to spend, as long as you don’t have friends and family you can’t be happy.Psychology and Higher Income Levels Essay

The other most important step to reach the happiness is our satisfaction. Because actually the money doesn’t make us happy, it can help us just by providing some satisfaction. When we lost our satisfaction, it means we lost our happiness and this is exactly what our possessions do. Lots of people in consumer countries and societies think that they always need more money than they have now, even if they are wealthy and rich people. In the book of Clive Hamilton, this situation is stated with this sentence:” The trouble with the rat race is, even if you win, you are still a rat.” Because of the society that they belong to, they are convinced that more money means always more happiness. So without exception all people are trying to have more possessions to be satisfied by being able to buy what they need. But there is an insidious fact they always forget, and it is that at the same time they are raising their threshold of sufficiency, and decreasing their rate of happiness. The answer of how they can raise their threshold is meanwhile their needs change as incomes rise. While this is being happened, usually most of people are unaware of this situation. So no matter how they are wealthy, unconsciously it is working against their satisfaction and happiness. According to the Affluenza, studies shows that most people would prefer an income of $50 000 if the average is $40 000 to an income of $70 000 if the average is $100 000, that is, most people would rather be poorer, provided others are poorer still. Moreover, in late 2002 when a newspoll survey asked Australian people (richest) whether they can afford to buy everything they need, the answer investigators got is that sixty-two per cent of Australians believe they cannot afford to buy everything they need. If we consider Australia is one of the richest countries, it is a really good example of dissatisfaction and rat race.Psychology and Higher Income Levels Essay

Self-control is the ability to control one’s emotions, behaviors and desires or is the capacity of efficient management to the future, in this process without any control mechanism is it possible to have a good life or live peaceful. Of course NO, because the failure of self-control can cause immense personal and societal repercussions on people. So in this world everyone has to have self- control to handle with obstacles and bad effects of our environment but our possessions are such a dreadful nightmare for self-control that when we look at the whole world suffering of lack of self-control results from more money people have. Because as long as you have more money your ability to prevent yourself from doing something false is getting weaken. For example, using of drugs are known as a way of escaping from stress and most of people don’t use it thanks to their self-control because they can see the results of this addiction after usage, but if there is a person who is rich and cannot be happy no longer with his possessions, due to dissatisfaction his/her self-control couldn’t work. And at this point he/she lose themselves in drugs and also their happiness lose in it. Beside their happiness their physical health also can be harmed like the brain, heart, and other important organs. We can give more general examples to this case like consumption and credit card debts. If you don’t have more money, by fear of debts and overconsumption while you are buying something or spending your money you try to be careful because you can imagine the results of overconsumption thanks to your self- control, but when you lose it, you plunge into debts immediately. So without the self-control we cannot be happy because it is most effective way to be careful about the harmful things. And money is the main enemy of the self-control.

On the contrary there is some people claim that money can buy happiness with its benefits in terms of providing higher living standards. Peter Saunders stated that

when workers start to get more profit, it results in higher living standards for workers as well as cheaper and more plentiful goods and services. And this improvement leads to a good life for workers.

Yes until a certain limit it is true because this world which has capitalist system is not suitable for living without money. Because money provides you necessities like shelter, education, health etc. Furthermore if you have a family, without a good income you can’t imagine a good life while you are trying to be alive in this world. But when you have enough money and you are able to supply what you need, after this point money’s importance suddenly decrease and remains only one way to be happy which is not money, just our relationships and our health. According to the Journal of Happiness Studies by Fischer, Claude S. Although Americans’ wealth increased substantially over the last few decades, their happiness did not. Because as I said before this is not the case of money after a certain point. So no matter without enough money we cannot be happy, it doesn’t mean happy comes from wealth and possessions.Psychology and Higher Income Levels Essay

To conclude, if you have enough money for your basic necessities, after that happiness doesn’t come from money. On the contrary, as long as you have a great amount of money or try to have more money than you have, in the pursuit of wealth and possessions you can lose your most important relationships with your friends and family which make you really happy, furthermore your mental and physical health can be affected very badly because of dissatisfaction and lack of self control. Briefly attaining wealth is not essential for our fulfillment even it is against.

There are two implications can be utilized in making satisfactory individual financial decisions. In one hand, when people make consumption decisions, if the utility is constant, which means the same outcome, the saved money will be the earning, that will be generated relative income in the consumption activities. When people involved investment decisions, if the utility is constant, it also means the money not losing in some certain period will be the earning, that will generate relative income from investment activities.

As a result, applying mental account measurement to manage consumption and investment expectancy might increase relative income effectively, so as to improve happiness accordingly.

However, increase relative income could not only be the method, although it might lead to marked improvement of happiness. To pursue long term happiness or wellbeing, a World Values Survey (WVS) indicates another option approach (Ball &Chernova, 2008). WVS researcher revealed, absolute income and relative income are apparently correlated with happiness, which questionnaire included 227 items, involved samples over 70 countries (Ball & Chernova, 2008). The effects of income on happiness have been measured linking with monetary factors. But income growth might eventually lead to improvements in some of the factors that have a big impact on happiness, such as health and employment. So to some extent, further social factors might lead to the growth of income, it may have a large effect on happiness.Psychology and Higher Income Levels Essay


As above discussed, this essay has shown reasonable research findings among absolute income, relative income, and happiness. In general, it is clear that income affects happiness obviously. In particular, compared with similar social group such as peer, friend, and colleague, to a more extent, it should be realized that relative income affects happiness strikingly because of jealousy. Compared with personal historical income or investment performance, relative income can also be seen apparent effects on happiness, since greed of normal people. Therefore, although other social factors may also affect happiness, personal strive and psychological adjustment must be born in mind. This could come in two different ways. By managing consumption and investment expectancy, to increase relative income might be helpful to improve happiness effectively. This mental account measurement has revealed that behavioural finance incorporates parts of finance, economics and psychology and includes bridges among theory, evidence, and practise.

Due to the complexity of social interaction, one limitation of this conclusion needs to be explained. Data analysis between different social group are just compared in one country. Lack of real data, this has to be interpreted among different country in the future. However, it is truly believed that, with the development and interaction of cross-subject, a better way could come into practise.Psychology and Higher Income Levels Essay

(Krueger 1988)

How it starts

Oniomania has no direct cause, since there is no specific pattern to the way of life of the people who have been diagnosed with as being shopoholics. Some Psychologists speculate that this condition might generate from developmental neurobiological and cultural influences, thus early life influences such as sexual abuse might be some of the cause. It should also be noted that this condition is mostly common in the developed world, probably because of higher income levels thus more of the disposable income and a higher ease of access to credit facilities. Oniomania is also higher in women as compared to men, with a survey in the USA revealing that of those people that were diagnosed with the condition 80% were women.(Lawrence 1990)Psychology and Higher Income Levels Essay


The biggest beneficiaries of shopopholism are the retailers who benefit with increased sales especially during the festive seasons. Shopoholics on the other hand benefit to some extent by having a wide variety of items that they bought to choose. They also feel elated in the experience of shopping and hide from the problems in their lives, and some even feel more gratified than even being in a relationship. It should be noted however that these benefits ultimately lead to bigger problems.