Is happiness independent of income? Set point theory à la Kahneman

Abstract The income–happiness nexus is paradoxical. One dataset shows that happiness tracks income, while another shows that, in rich countries, happiness does not. This paper focuses on the limits of set point theory (known also ‘hedonic treadmill’ or ‘hedonic adaptation’) to solve the income–happiness paradox. To keep it manageable, it focuses on Daniel Kahneman's attempt to solve the paradox. He first employs his distinction between ‘the experiencing self’ and ‘the remembering self’ to solve the paradox. While the distinction is useful for the study of heuristics, it is irrelevant for the question at hand, the solution of the income–happiness paradox. Sensing such irrelevance, Kahneman turns his attention to the ‘life evaluation’ measure. This measure ironically shows that happiness tracks income. However, Kahneman disputes such tracking, arguing instead that happiness tracks income only if people, when they were teenagers, designate income as a life goal. The appeal to ‘goals’ or ‘life plans’, however, is an endorsement of a sophisticated version of set point theory. Kahneman argues that happiness varies with the variation of the designated goal or life plan, not with income per se. However, if happiness varies with the designated goals or life plans, it ultimately means that happiness cannot be conceived as a set point. Thus, Kahneman's argument effectively sends us back to square one, failing to solve the income–happiness paradox.