Why Nobel Prize Winners Were So Wrong About The Ideal Income

In 2010, Nobel Prize winners Daniel Kahneman and Angus Deaton from Princeton University argued that $75,000 was the ideal income where happiness increased no further.

As someone who made as little as $4/hour at McDonald’s to multiple six figures a year working in investment banking, it was clear to me happiness continued way beyond the $75,000 threshold.

In response to the Nobel Prize laureates’ claims, in September 2010 I wrote The Ideal Income For Maximum Happiness. My article argued that $200,000 per person was more appropriate. Several years later, the figure was updated to $250,000.

Why $200,000+ Was The More Appropriate Income

Back in 2010, I was coming off a down compensation year due to the global financial crisis. However, I clearly remember once my income surpassed $200,000 I felt happier because I had more breathing room. I could save more money for retirement, afford a nicer place to live, and not worry as much about parking tickets!

But after surpassing $200,000, I started to feel the impact of higher taxes, partially due to the Alternative Minimum Tax (AMT). Further, with an income above $200,000, you were deemed by society to have entered the “evil rich class,” the income level at which Obama wanted to raise the marginal federal income tax rate.

The Occupy Wall Street Movement was in full swing and “sh*t was f*cked up and bullsh*t” as the saying went. Hence, you also didn’t feel good about earning much more than $200,000.

In 2010, I was working more and getting paid less due to the economic meltdown. People like me were also being vilified for causing the housing crisis even though I worked in international equities. The idea of paying more taxes once you earned above $200,000 wasn’t appealing.

With $200,000 per individual or $250,000 for a family of up to four, you could live a comfortable life without anybody bothering you. To me, that’s happiness!

The Ideal Income For Maximum Happiness Goes Up

Then in 2014, I noticed a fascinating Gallop poll from 2013 that highlighted that 100% of the participants who made more than $500,000 were happy! It seemed unbelievable, but see the chart yourself.

I had never seen a study where there was 100% agreement or efficacy. Therefore, I thought this fascinating piece of data would surely change the minds of Daniel Kahneman, Angus Deaton, and everybody in this field who believed in their $75,000 hypothesis.

It surely helped convince me that earning $200,000 a year per person may be too low. As a result, in August 2014, I decided to write a follow-up post entitled, The Secret To Ultimate Happiness Revealed: Make $500,000+.

The post was well-received. But it didn’t spread like wildfire like my post on scraping by on $500,000 did. Based on the hundreds of comments in the latter post, it seemed like people prefer raging against those who make a top 1% income rather than accept the possibility $500,000 was the ideal income number for happiness.

Due to the desire for harmony, in 2014, I only updated my ideal income for maximum happiness by $50,000 to $250,000 to account for inflation.

But here’s the truth. I thought $500,000 was a more realistic ideal income figure based on my own experience. Once you get to $500,000, you feel like you’re finally really getting financially ahead, especially if you don’t have kids.

Alas, I haven’t dared to voice this belief until now.

A Nobel Prize Winner Finally Changes His Mind About The Ideal Income

13 years after postulating the $75,000 figure, Daniel Kahneman along with new partner, Matthew Killingsworth from UPenn has now published a new study. Their study claims that happiness rises as income does. Not a surprise.

What is a surprise, however, is that their study found an increase in earnings up to $500,000 boosted happiness for most people. The researchers tracked data gathered from more than 33,000 U.S. adults who earned at least $10,000 a year. Participants used a smartphone app that asked about their mood at random intervals during the day.

“The exception is people who are financially well-off but unhappy,” Killingsworth explained. About 20% of people are part of this “unhappy minority,” the researchers found. For that group, additional income over $100,000 per year didn’t appear to make a major impact on their mood.

In other words, if you’re rich and miserable, more money won’t help. And as I’ve mentioned many times before, I know plenty of very rich people who seem no happier than a person making a middle-class income of $75,000 – $125,000 a year.

Why Did It Take 13 Years To Change Their Minds?

A good scientist is one who changes their mind when new data presents itself. Although there was a poll in 2013 by Stevenson and Wolfers that showed increased happiness up to $500,000. I guess to the Nobel laureate, their data wasn’t good enough.

I’ve shot Professor Kahneman an e-mail asking why he made such a huge revision from $75,000 to $500,000, but he didn’t respond. So let’s hypothesize why he had to change his beliefs:

1) The Need To Account For Inflation

Staying at $75,000 thirteen years later in 2023 is clearly too low thanks to inflation. If we assume a three percent average inflation rate for 13 years, $75,000 turns into $110,000. Therefore, Kahneman and his colleague had to raise the income level.

After all, the median household income in America is about $75,000 in 2023. Some households only have one person. And clearly, not every single-person household feels they’ve reached maximum happiness.

But that still lives $390,000 of income unaccounted for. What gives?

Inflation chart by category

2) Anchoring To A Professor’s Salary

One of the reasons why I hypothesize Kahneman and Deaton thought $75,000 was the ideal income for maximum happiness in 2010 was because $75,000 – $79,000 was the median professor salary back then.

No matter how much we think we are fair, we always have biases. Our biases are why everybody tends to look alike, talk alike, and come from the same socioeconomic backgrounds.

Being a professor is considered a prestigious job. Therefore, Kahneman and Deaton could have easily anchored to their salaries and felt like life can’t get much better. After all, they have the prestige, status, respect, and money.

As Kahneman and Deaton started making more money after winning the Nobel Prize and writing new research, their happiness grew. They could experience firsthand what it was like to earn much more money. By 2022, it is my belief Kahneman and his new partner experienced what it was like to make $500,000 or at least come close to it, hence, the income increase.

Today, professors like the Bankman-Frieds from Stanford University can make way more money than $500,000 a year given they purchased a $15 million vacation property in the Bahamas! I’m assuming the professors honestly made the money, because throwing away their reputations after a lifetime of contribution would be irrational.

Professors can buy multi-million dollar mansions
Professors Bankman-Fried’s vacation property in the Bahamas. Not bad for being a professor.

3) Pressure From Other Academics And Financial Experts

Finally, I suspect Kahneman and his Nobel laureate colleagues raised their $75,000 ideal income threshold due to pressure from others in his field. HIs work was so widely cited that many academics and experts in the finance field took notice.

As the pushback against such a low ideal income figure grew, Kahneman and his colleagues had to rethink their analysis. Otherwise, they would seem completely out of touch with reality.

For one, there are huge cost of living differences in America. To make a blanket statement that $75,000 was the ideal income when the median home price in some cities is over $1 million would be absurd.

Second, they have reputations to protect. Just like rigidly following the 4% Rule from the 1990s might not make sense 40 years later, so does sticking with an outdated datapoint as the world changes.

It makes much more sense if such professors came up with a dynamic ideal income figure that changes based on inflation or a cost-of-living index. A dynamic safe withdrawal rate in retirement is what I believe in given the world is always changing.

4) Elitism And Reverse Ageism Perhaps

Stevenson and Wolfers, the professors who published in 2013 that happiness continued to increase when income went above $500,000, are from the University of Michigan. Although Michigan is a great university, perhaps Kahneman and Deaton from private Princeton University looked down on public Michigan University.

Maybe Kahneman and Deaton also thought Stevenson and Wolfers were too young and experienced as well. How dare they challenge their $75,000 assumption! Kahneman and Deaton are in their late 80s today, while Stevenson and Wolfers were under 40 when they published their findings in 2013.

If there’s one industry where people care most about prestige and status, it’s in academia. Good ‘ol snobbery could be involved!

5) Pressure From The Government To Lower The Income Number

In 2010, there was huge social unrest as millions of people lost their jobs and their homes. In fact, according to the Census Bureau, the real median household income actually fell by 2.2% from 2009 to 2010 to $50,046.

Universities and the government collaborate all the time. After all, the government is a huge source of funding for research.

Coming up with a $75,000 ideal income for maximum happiness is clearly more achievable for the American public than earning multiple six figures. As a result, the government could have pressured Kahneman and Deaton to lower the true ideal income figure to help calm the public.

By lowering financial standards, it’s easier to feel better about your financial situation. And the better you feel, the less likely you will revolt!

It’s Hard To Be Completely Honest About Money And Happiness

Although I’ve tried my best to be completely honest with you about money and happiness, I still find it hard to do. The amount of judgment you receive about supporting higher income levels or wanting to make more money can be harsh.

Read some of the comments in the following posts to see for yourself. Despite using hard numbers and math to come up with my arguments, there’s still a lot of backlash. As a result, it’s often better to keep mum about such things.

However, now that Nobel Prize laureate Kahneman has raised his ideal income for maximum happiness to $500,000, I feel better saying so as well. If anybody wants to bash me for this belief, I can now just refer to Kahneman and Killingsworth’s new study.

Free at last!

Why $500,000 Is An Income Worth Shooting For

You don’t have to make $500,000 a year to be happy. But if you’re curious about experiencing the greatest amount of happiness you can, you might as well try making $500,000 for one year and see what happens.

If you do, you may feel happier because:

  • You’re making more than 99% of people in the world
  • After maxing out your 401(k) or 403(b), you should have tremendous savings left over to build your taxable portfolio and rental property portfolio
  • You can fly Economy Plus or even First Class on occasion without feeling much pain
  • You can easily give $10,000 – $25,000 a year to charity without much constraint
  • You can afford to buy a $1.5 – $2.5 million house according to my 30/30/3 home-buying guide
  • You can save for your children’s college education by contributing the maximum gift tax limit to their 529 plans each year
  • You have the option of retiring in 10 years or less if you dramatically cut down your expenses
  • There’s less stress about getting into financial trouble

The main reasons why you might not be happy making $500,000 a year are:

Different Ideal Income Amounts For Everyone

Not only are there dramatic cost of living differences in America, there are also tremendous differences in individual desires. As a result, there’s really no one ideal income figure that fits all.

My recommendation is to try and make $75,000, $200,000, $300,000, $400,000 and then $500,000 a year. At every income level, assess how happy you are on a scale of 1-10.

If your happiness is declining despite making more, then you may have to adjust your work and/or lifestyle accordingly.

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Income Composition Also Matters For Happiness

Personally, I live in expensive San Francisco with two kids. I’m happy to stay so long as I can earn enough.

As a result, my goal is to earn $400,000 a year in passive investment income to feel 100% financial secure. If and when I go back to work, then I could strive to earn up to $100,000 to hit the “magical” $500,000 market.

The $100,000 or less day job would be fun, instead of stressful. Meanwhile, having a good mix of active income and passive income is ideal because it means you’re diversified and doing something you enjoy.

We all want to do purposeful work. Purpose is what creates happiness, not the other way around. As a result, we all should make some active income.

At the same time, we all want to earn enough passive income to take care of our basic living expenses. Once we have that safety net, earning income from purposeful work feels like you’re constantly winning the lottery.

Don’t Have to Make $500,000 To Be Happy

If you don’t want to make $500,000 or can’t, no problem. There are plenty of ways to feel happier without needing a half-a-million-dollar salary.

Moving to a lower cost area of the country or world is one solution. Not wanting the best of everything is another idea. Another solution is ensuring you are surrounded by friends and family.

Once you earn enough to cover your basic needs, perhaps what’s most important for happiness is having a positive state of mind.

If you can constantly express gratitude for the things that you have, I dare say you will be one of the happiest people in the world!

Reader Questions And Suggestions

Why do you think Kahneman dramatically raised his ideal income for maximum happiness to $500,000 from $75,000? Why do you think Kahneman and Deaton were so wrong in 2010 when they came out with their $75,000 figure? What do you think is the ideal income for maximum happiness?

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