Happiness is a matter of perception

Clive Smith

Russell Investments

Lower interest rates around the world have boosted asset prices in many countries. What’s interesting is that this hasn’t necessarily resulted in an increase in "happiness". The divergent experience of Australia and the US, post 2008 may assist in explaining how ‘perceived relative wealth’ impacts on a nation’s happiness.

Australians are relatively happier

According to the World Happiness Report (2019) an interesting phenomenon occurred in that Australians became happier than their US counterparts. This shift was made even more pertinent as prior to the Global Financial Crisis (GFC) Happiness, as measured by the level of happiness from 2005-2008, for Americans and Australians was roughly at the same level (See Figure 1).

It’s in the decade post 2008 (post GFC) that Australians became happier than Americans. This change wasn’t because Australians became happier in an absolute sense (levels of happiness were largely constant) but rather because Americans became materially less happy (see Figure 2).

What determines happiness?

To try and understand what may have driven the change in happiness over the last decade one must enter a relatively new and still contentious debate. Until recently economists and psychologists viewed their respective topics of utility and social well-being as quite distinct and effectively ignoring each other. Of late, economists have taken more interest in what factors determine happiness. The result has been a wide-ranging debate not only over what drives happiness but also whether it can even be quantified. While acknowledging the ongoing debate, studies have suggested that various ‘quantifiable’ factors may impact upon happiness. These can be broadly classified as:


  • Democracy
  • Political stability
  • Freedom
  • Social mobility
  • Social interaction


  • Unemployment
  • Consumption/Income
  • Relative wealth

When considering many of the ‘quantifiable’ factors, of most interest is that over the last decade it is unlikely that there would have been a material shift in the relative position of Australians versus Americans; i.e. most of the social factors are unlikely to have materially diverged in the last decade. Even with respect to social interaction it is reasonable to assume that any impact arising from social media would be largely the same in both geographies. The same holds broadly on the economic front with both countries having witnessed similar conditions with respect to unemployment and consumption/income over the last decade.

Is perceived relative wealth the driving factor?

With the Americans and Australians having experienced similar dynamics across a range of key factors it begs the question as to whether differences in relative wealth can explain the apparent divergence in happiness. When considering relative wealth there are several dimensions which need to be considered. The first is the wealth of an individual over time. Evidence suggests that material increases in an individual’s wealth over time has a transitory effect. There are initial gains in happiness and a tendency over time to revert to a base level of happiness as the individual becomes accustomed to a new level of higher wealth. The second dimension, and potentially more important, is the assessment of one’s wealth relative to those around them; i.e. wealth dispersion. Studies have indicated that relative wealth (or the level of wealth dispersion within a population) is an explanatory factor behind happiness.

While many studies focus on the impact of actual wealth dispersion it’s also important to look at the individual’s perception of changes in relative wealth; i.e. changes in perceived relative wealth. The distinction between actual and perceived relative wealth is important as perceived relative wealth effectively frames changes in absolute wealth dispersion within the context of the overall wealth impact experienced by the general population. The distinction between actual and perceived relative wealth can be more clearly illustrated by rephrasing the argument as : ‘I am less likely to care if my neighbour is experiencing larger increases in wealth if I am also experiencing a material increase in wealth myself’. This implies that, even though the dollar value of relative wealth dispersion may be increasing by the same amount under both scenarios, the perception of increasing wealth dispersion may be reduced when both parties are experiencing material increases in wealth over time.

As the concept of perceived relative wealth is largely a qualitative concept, it may be useful to consider using a simplified framework for wealth to illustrate how it potentially impacts on differences in happiness between countries. The simplified framework adopted assumes that there are only two asset classes and population sub-groups within a population characterised by a high ratio of home ownership. The two asset classes and population sub-groups are referred to as ‘Shares’ and ‘Houses’. ‘Shares’ comprise the relatively small proportion of high wealth individuals where wealth effectively comprises shares. By contrast the ‘House’ sector comprises the rest of the population where the predominant form of wealth is the family home. With a simplified framework the impacts on perceived relative wealth can be encapsulated by the differences in the returns for the two asset classes (1).

How has the performance of shares and houses differed?

In Australia, over the last decade, there was an increase of wealth for both Share and House groups within the population. Comparing price levels (Figure 3) highlights that while Shares from 2005 have posted a higher return the difference in returns is not particularly material. The result being that both sub-groups of the population, whether Shares or Houses, felt a material and similar quantum of return from their assets.

This contrasts with the experience of American’s where the higher returns from the inflation of asset prices was predominantly captured by Shares (see Figure 4).

Indeed, within the US it’s debatable that the House sub group, which comprise a large majority of the population, felt any increase in wealth from their assets over the last 14 years. This contrasts with Shares, which have seen their wealth from asset returns more than double over the period from 2005. In the US the increase in wealth is only being felt by one relatively small sub-group of the population (2). It’s therefore not unreasonable to view that the perceived deterioration of relative wealth within the US would be materially greater than that in Australia. This divergence in perceived relative wealth, arising from the difference in asset class returns, may go some way to explaining the relative decline in happiness for Americans compared to Australians in the last decade.

The dramatic lowering in interest rates over the last decade aimed at achieving several objectives, one of which was increasing asset prices. Despite this increase in asset prices there hasn’t been a commensurate increase in happiness in the US. Indeed, happiness in the US, in contrast to a socially and economically comparable country such as Australia, has declined in both an absolute and relative sense. Though there may be a range of factors impacting on happiness, a simplified framework has set out to illustrate that differences in perceived relative wealth may have been a key factor in explaining the different experiences in Australia and the US. Specifically, the failure of lower interest rates to fuel an across-the-board increase in asset prices in the US may have contributed to the decline in happiness. Whether the similarity in returns for the different asset types in Australia is a case of good luck or good design is open to debate. The impact of perceived relative wealth means that ongoing happiness is not something which should be taken for granted simply because national wealth is increasing due to lower interest rates. Australia’s ability to maintain its level of happiness could easily depend on the ability of housing and shares to continue exhibiting similar return characteristics and the benefits of lower interest rates felt by a broad cross-section of the population.

2 topics

Clive Smith
Senior Portfolio Manager
Russell Investments

Clive Smith is the Senior Portfolio Manager on Russell Investments’ Australian fixed income team. Responsibilities span management of Russell Investments’ Australasian fixed income funds as well as conducting capital market and manager research...


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