“The happiness of China’s residents is still at a relatively low level compared with the rest of the world. According to the World Happiness Report,..” note the research team in the paper highlighted today.
Raising ‘happiness’ must then be a goal for a government that wants to maintain legitimacy and do the right thing by the citizenry. Studies on happiness are therefore particularly appropriate in a China context.
Zifang Li (et al.) from the Hunan University’s School of Business used the 2019 China-wide household survey to see if there was a relationship between financial literacy and happiness. Whilst acknowledging an individual’s financial condition is only one component of happiness the research points out it’s a none-too-trival one nonetheless.
The work usefully digresses into the Easterlin Paradox, a still contentious notion first promulgated by Professor Richard Easterlin in 1974. This is the idea there isn’t a linear relationship, beyond a certain point, between income and happiness. Instead it’s where you sit relative to your neighbors and how you’re traveling in that relationship that’s more important.
In today’s paper the researchers discover something similar in the form of an inverted-U curve. As an individual’s financial literacy increases so too does their happiness. Until, this curve peaks, and thereafter greater financial literacy leads to a counterintuitive decrease in happiness; but why?
It seems as financial literacy increases, from a low base, individuals discover more ways to maximize their income/savings. Then the problems start. As they become increasingly sophisticated they venture into riskier propositions, start spreading their bets and become over-confident. This leads to poor decisions and unhappiness.
The paper concludes with two policy recommendations.
First, increase basic literacy via school curriculum which would help people up the curve to begin with.
Second, stress the need for continuing financial education, for ALL, thus reshaping the curve for more sophisticated investors. [N.B. ALL the good investors I’ve ever come across, in some way or another, constantly learn].
You can read the paper in full here The Well-Being Inflection Point.
Happy Sunday, who knew an ongoing interest in finance would keep them coming? 🙂 🙂 🙂 🙂 🙂