The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.
It is worth noting that it is the long-term trends in happiness and income that are unrelated. In the short term, the two factors normally go up and down together. For example, consider the sentiment that accompanies stock market crashes. Consumers tend to be sad in the immediate aftermath of a crash but become happier as the market starts to recover.
The Easterlin paradox has been hotly debated because of the inherent problems with defining happiness and the far-reaching implications for public policy. Indeed, if economic growth does little to enhance happiness beyond a certain point, should governments instead focus on measures of national happiness?
Easterlin paradox findings
In a comparative study using data from the United States and 11 other countries, Easterlin reported the following findings:
Within countries, wealthier individuals reported a higher level of subjective wellbeing (SWB) than did poorer individuals.
Across countries, there was no comparable difference in the SWB of countries deemed to be rich and countries deemed to be poor.
Third, the results of a longitudinal study found that the economic development of a country did not increase the individual SWB of that countries’ citizens.
From these findings, Easterlin made two conclusions:
On the micro-level, the income of an individual increases subjective well-being significantly.
On the macro level, the national economic growth of a country expressed as per capita GDP does not necessarily increase subjective well-being.
Interestingly, these conclusions were consistent across countries with different traditions, cultures, natural environments, economic environments, and political systems.
Criticisms of the Easterlin paradox
In addition to subjective definitions of happiness and broader policy implications, there is much debate around the validity of the Easterlin paradox itself. Though beyond the scope of this article, Easterlin’s data collection and analysis techniques have been called into question.
Subsequent empirical studies found that SWB was much higher in rich countries than it was in poor countries. What’s more, there was also a significant correlation between per capita GNP and national wealth with the subjective well-being of a nation’s citizens.
Another study in 2006 by Veenhoven and Hagerty found that the SWB in developing nations such as India, South Korea, Philippines, South Africa, Brazil, and Nigeria had increased substantially over the previous 50 years. In releasing their data, the pair refuted Easterlin’s claim that economic growth did not add to the quality of life measures that increased happiness.
Further economic data from China also cast doubt on the Easterlin paradox. The data showed that Easterlin’s conclusion at the micro-level was supported. However, at the macro level, the data showed that stagnation in SWB among Chinese citizens was evident but not because of economic development per se.
In the case of China, the period of rapid growth caused many citizens to lift themselves out of poverty and become happier as a result. However, the fact that the period of growth occurred for so long meant the increase in happiness was offset by widening income inequality. These two effects canceled each other out and caused SWB to trail behind economic growth in the country – but not for the reasons Easterlin’s theory stipulates.
In response, Easterlin revised the theory and posited that a U-shaped pattern best illustrated the relationship between economic development and SWB. In the short term, SWB is positively correlated with a nation’s economic growth. In the long term, however, this growth has a limited effect on individual income. This revision, at least to some extent, made the Easterlin paradox more convincing to skeptics and arguably more relevant to countries undergoing similar economic growth.
Key takeaways:
The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent. It was first described by then professor of economics at the University of Pennsylvania Richard Easterlin in 1974.
The Easterlin paradox found that on the micro-level, the income of an individual increases subjective well-being significantly. On the macro level, the national economic growth of a country does not necessarily increase subjective well-being.
The Easterlin paradox has attracted criticism for the data on which it is based. Subsequent studies found a strong correlation between economic growth and subjective well-being in developing countries. Data from a period of growth in China also found that the relationship between income and happiness was more nuanced than the Easterlin paradox accounts for.
Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.
Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.
Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.
Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).
The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.
The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.
The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.
The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.
The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.
The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.
The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.
First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.
The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.
The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What in marketing can be associated with social proof.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
