Should investors consider happiness rather than GDP?
The practice of gratitude helped me through the Covid-19 lockdowns last year. Every day I would write down three things that I appreciated in my life. This allowed me to reflect on what made me happy.
I recently found that gratitude journal and reading it again, it was clear that the things that made me happiest tended to be things that money cannot buy.
This goes against everything I have been taught in my career as an economist, where Gross Domestic Product (GDP) as a monetary value of an economy, is the main measure of societal performance. I should only be as happy as the material things I own.
Of course, I am not the first person to have considered this. About a decade ago, Nobel Laureate Joseph Stiglitz commissioned a report called Mismeasuring Our Lives: Why GDP Doesn’t Add Up. It presented the case for retiring GDP in favour of wellbeing and in recent years, this idea has gained traction under the Beyond GDP movement.
The idea of using wellbeing as a measure of societal performance has been accompanied by the rise in the number of investors considering social factors in their decision making. And figuring out what makes society happy helps us identify the risks to the global economy from the S in ESG.
Money can buy happiness, but only up to a point
GDP per person has a strong relationship with national happiness, explaining 56% of the differences across countries (see chart below).
But the richer someone is, the smaller the boost in happiness from becoming richer. Happiness plateaus as the average income in society reaches $70,000 (see chart below).
The shape of the relationship between happiness and income is significant for two reasons. Firstly, in the broader context of inequality this supports the case for distributive policies. Secondly, for rich countries, there may be more effective ways for society to boost happiness than by solely pursuing more economic growth.
What else matters?
The Organisation for Economic Co-operation and Development (OECD) was one of the first international bodies to bring together internationally comparable measures of wellbeing under its Better Life Index.
But some things matter more than others when it comes to driving wellbeing. To explore this, we use regression analysis to explore what objective social factors best explain subjective happiness, measured by life satisfaction. Four factors stand out as having the strongest relationship with happiness. These are personal income, long-term unemployment, self-perceived health and perceived corruption.
Corruption erodes social trust
Investors have long considered corruption and wider governance measures as important. The perception of corruption data that we use in our work is in fact a measure of institutional trust, which captures both government and business corruption. More specifically, survey respondents are asked whether corruption is widespread in government and business? This also has a good relationship with broader trust in society, where people are asked whether they can trust others (see chart below).
It is no surprise that emerging markets have higher perceptions of corruption than developed markets (see chart below). Within developed markets, the Nordic countries have the lowest perception of corruption and highest social trust levels. This helps to explain why these countries consistently rank as the some of the happiest in the world.
However, Eastern Europe stands out as having especially high perceptions of corruption with Romania, Portugal and Hungary topping the list across both major developed and emerging markets. Italy and Greece also score relatively low.
Mental health matters
Unsurprisingly, health has a strong relationship with happiness, and it is a theme that popped up in my journal several times.
The measure we use is self-reported health – the share of those reporting “at least good” health. Importantly, this reflects that self-assessed health combines both mental and physical health. Mental health is especially important to consider in advanced economies, where life expectancy and other measures of physical health are already very high (see chart).