Extrinsic goals may not promote optimal happiness and well-being, but that's not to say money isn't associated with substantial amounts of life satisfaction. Money buys things we need and value. How much money we make compared to other people—our relative income—is strongly related to satisfaction and happiness. "Money buys happiness for a person, and quite a lot of it," says British economist Andrew Oswald. "The evidence suggests that people care intensely about their relative income. This shows up in brain-scan evidence and in happiness equations."
If having money makes us happy, spending lots of it, by contrast, does not seem to do so. When we buy an expensive item, it turns out, our joy in having it fades over time. This trait, given the name "hedonic adaptation" by social scientists, helps explain why having lots of possessions may provide us some sense of satisfaction but not lasting happiness. In recent years, the rising field of behavioral economics has uncovered additional insights about differences between the perceptions that motivate us and the actual results of our efforts. As it turns out, people are often very out of touch with what they really want. Nowhere is this truer than when it comes to money.
Psychologist and Nobel prize winner Daniel Kahneman breaks the idea of subjective well-being and happiness into two components: the emotional well-being shaped by everyday experiences, and a person's cumulative life evaluation. Many researchers find that life evaluation does not benefit from money, beyond having enough to meet basic needs. Kahneman disagrees, and finds that higher income improves a person's life evaluation even among people who are already wealthy.
However, he found in research that there is a ceiling of about $75,000 a year in how much people need to achieve their maximum amount of emotional well-being. People making more than this amount of money did not feel they gained additional happiness, the research found. "More money does not necessarily buy more happiness," he said. "But less money is associated with emotional pain." Oswald, by contrast, thinks Kahneman's findings warrant more research.
If the things we think are important (intrinsic goals) are not reflected in how we actually behave (extrinsic goals), what should we do? Kasser and others point to a small but growing effort, mostly in Europe, to stop associating our well-being solely with economic growth. The notion of Gross Domestic Product, he says, should be expanded or replaced with a measure that includes physical and mental health plus other measures of well-being and happiness.
It could also help for people to spend more time thinking about their goals, how well they are meeting them, and whether they are happy with their choices. Kasser has developed an Aspiration Index that uses 40-odd questions to help people understand where they are on the intrinsic-external value scale.
A simple exercise developed nearly 50 years ago called the Cantril ladder is still widely used as an accurate self-evaluation to help people think about their life goals and measure their well-being. It asks people to assume that there's a ladder with steps numbering from zero at the bottom to 10 at the top. The best possible life would be a 10 and the worst life a zero. Which rung are you standing on right now? Which rung do you think you will be standing on in five years?