Income and well-being: How big is the gap between the rich and the poor?

One of the most enduring debates in the literature on subjective well-being concerns the importance of money. Studies consistently show that the correlation between income and well-being is small. This evidence has been interpreted to mean that money does not matter and that people’s intuitions about the causes of happiness are wrong. However, correlation coefficients are notoriously difficult to interpret, and thus it is possible that lay people’s intuitions are correct, whereas psychologists’ interpretation of correlation coefficients is wrong. Data from two large-scale studies replicate the relatively weak correlation between income and happiness. However, both studies show that these small correlations translate into large mean differences between rich and poor groups. These mean differences are medium in size even when the wealthy are compared to average. In addition, measurement error has negligible effects on the correlation coefficient, but has strong effects on the rich/poor happiness gap.