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Friday, January 02, 2009

Money and happiness: more

Justin Wolfers writes:

Sonja Lyubomirsky wrote that subjective well-being has remained high during the recession. But she’s dead wrong.

Here’s the gist of her piece, titled “Why We’re Still Happy” :

Research in psychology and economics suggests that when only your salary is cut, or when only you make a foolish investment, or when only you lose your job, you become considerably less satisfied with your life. But when everyone from autoworkers to Wall Street financiers becomes worse off, your life satisfaction remains pretty much the same …

So in a world in which just about all of us have seen our retirement savings and home values plummet, it’s no wonder that we all feel surprisingly O.K.

Wolfers has charts to show people feel less happy now. I'll post on the problems with that approach later, but in this post I want to discuss Sonja's piece.

Following Sonja's logic, we will all be much unhappier in 2009. It will become clearer that "just about all of us" have NOT seen the value of our house go down in a way that affects us. Some will be foreclosed, some will be house poor, some will find they are now able to afford housing, and some really won't care because falling house prices mean they sell for less but their next house can be bought for less.

Similarly, there will be a lot of people whose retirement savings declined below sustainable levels, and so they can't afford to retire despite years of saving and having paid a lot for financial advice. Others -- including my father, who didn't complete high school and who's investment strategy has been to see what nearby physical bank nearby offers the highest CD rates -- will continue to follow the same path they've been following and will be unaffected.

Right now, we're in the early stages and the winners/losers are less clear.

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