Monday, November 16, 2009

Diminishing Marginal Utility of Wealth

Don't get scared by the title. Here's the vocabulary: diminishing: increasing at a decreasing rate, marginal: counting each increment, utility: happiness, and wealth: how rich you are. Or to put it plainly, Diminishing Marginal Utility means the more you consume of something, the less you enjoy it. The first bite of your dinner is better than the last. You'd pay one price for the first ride on a roller coaster, but you'd pay less for the 10th ride. Personality quirks can be charming on the first date, but get irritating by your one year anniversary. The same hold true for money.

Diminishing Marginal Utility of Wealth means the more wealth you have, the less happy each incremental dollar makes you. A dollar means a lot more to someone in third world, than it does to Bill Gates. I say this as a challenge to what I say regularly on this blog. Sure people are richer they than used to be, but does that mean they are happier? The general consensus seems to be that once humans get above the minimum wealth needed to support life, then the happiness brought about by each dollar gets smaller and smaller.

One possible explanation for why is happy amnesia. We forget how bad we used to have it. It could also be because happiness comes from relative comparisons of wealth. A keeping up with the Joneses mentality. A final reason could be the wealth/time constraint I've talked about before. That said, though they are diminishing, the benefits are not zero. There is still a strong correlation between measured happiness and wealth. We should continue pursue human progress, but not idolize it.

Update: The diminishing marginal utility of wealth begins at $40,000.

2 comments:

  1. Anonymous11:27 AM

    Very easy to understand. Thank you.

    ReplyDelete
  2. Anonymous8:25 AM

    thanks

    ReplyDelete

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