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Hedonic Adaptation: Why Money Won't Buy Happiness

Updated: Jan 31

What would you do if you won $1 billion or even just $1 million? Just think what you could do with all that money! Most of us have dreamed about winning big in the lottery and how our lives would change.

We would like to believe that all that money would decrease stress and increase happiness, but research is mixed. In fact, depending which study you cite, you could say winning the lottery has no effect on happiness, diminishes physical health or even worsens overall well-being.

Over the past 25 years, economists and psychologists have tried to figure out the hows, whys and why-nots of money and happiness. Why is it that the more money you have, the more you want? Why is it that buying the fancy car, the beachfront condo or latest shiny new gadget only brings fleeting joy? Why is it that we're irrational spenders with "found" money?

Psychologists refer to this as hedonic adaptation and it involves contrast and habituation. Let’s say you win $20 million. The research shows that at the end of a year, your happiness level is back to their baseline. Maybe you’ll buy some new stuff. But once the novelty of winning wears off and you’ve grown accustomed to your new lifestyle, life with that jackpot will stop feeling good and start feeling normal, and you’ll end up wanting more.

Contrast with the peak experience of winning lessens the impact of ordinary pleasures, while habituation eventually decreases the value of new pleasures made possible by winning.

But some studies found results suggesting that money does bring happiness. A 2007 study in Britain, found that the recipients of medium-sized lottery wins had significantly better psychological health. Another study found that lottery winners have better mental health — probably because they experience less financial stress — but may be in worse physical health, thanks to making riskier decisions.

“Mental accounting,” a concept named by behavioral economist Richard Thaler, says that when we receive money outside of our normal income, we are more likely to make irrational decisions with it.

The relationship between money and happiness is pretty complicated. A large analysis published in the journal Nature Human Behavior used data from the Gallup World Poll, a survey of more than 1.7 million people from 164 countries, to put a price on optimal emotional well-being and life satisfaction: between $60,000 and $75,000 a year. That aligns with past research on the topic, which found that people are happiest when they make about $75,000 a year. And another study found that after people earn $95,000 a year, emotional well-being and life satisfaction actually start to decline.

Fun Fact: The largest lottery jackpot ever won in U.S. history was one ticket sold in California on November 8, 2022 totaling $2.04 billion.

How much do you need to actually make your life better? Robert Pagliarini, a certified financial planner specializing in sudden wealth, says the ideal lotto take-home is $30 million after taxes—really, about a $100 million jackpot, where the cash lump option means you get 60% compared to the annuity. “The $30 million, if invested wisely, would allow you to live on $1 million a year with little risk of ever running out of money,”

If you want to know how to use the money you have to become happier, you need to understand just what it is that brings you happiness in the first place. And that’s where the newest happiness research comes in.

Here are four key elements that have been scientifically linked to happiness.

1. People. Innumerable studies suggest that having friends matters a great deal. Large-scale surveys by the University of Chicago’s National Opinion Research Center (NORC), for example, have found that those with five or more close friends are 50% more likely to describe themselves as “very happy” than those with smaller social circles. Compared with the happiness-increasing powers of meaningful relationships, the power of money pales. The world is suffering from an epidemic of loneliness. Strong, authentic social connections are both a salve and a glue - in the workplace and in society.So do whatever it takes to invest in your friendships.

2. Experiences. Our preoccupation with stuff obscures an important truth: the things that don’t last create the most lasting happiness. That’s what Gilovich and Leaf Van Boven of the University of Colorado found when they asked students to compare the pleasure they got from the most recent things they bought with the experiences (a night out, a vacation) they spent money on. Experiences tend to blossom as you recall them, not diminish. Generally speaking, the people who are happiest are those who are best at creating experiences out of everything they spend money on, whether it’s a vacation or hiking boots.

3. Challenges. The brain loves challenges, and we’re often far happier while working toward a goal than after we reach it. Challenges help you attain what psychologist Mihaly Csikszentmihalyi calls a state of “flow.” Activities that are too easy are boring. Activities that are too hard are frustrating. But activities that are just right – activities that challenge us to stretch and grow mentally or physically – increase motivation, focus, and the production of dopamine. It’s called The Goldilocks Rule, and it’s the secret to maximum productivity.

4. Gratitude. There is a wealth of research showing that if you regularly practice gratitude, you’ll not only be happier, but you’ll be more creative, more fulfilled and healthier. In fact, you might even add years to your life.

For most of us, our dreams of winning big in the lottery will never materialize. But just buying a ticket can give us a warm, thrilling feeling of anticipation while we wait for the lucky numbers to be drawn. Psychologists call this the “let me dream on” effect. In the meantime, you’ll likely get a bigger payoff investing in people, experiences, challenges, and gratitude.


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