Life Satisfaction, Income and Personality

37 Pages Posted: 14 Feb 2015

See all articles by Eugenio Proto

Eugenio Proto

CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Aldo Rustichini

University of Minnesota - Twin Cities - Department of Economics

Abstract

We use personality traits to better understand the relationship between income and life satisfaction. Personality traits mediate the effect of income on life satisfaction. The effect of neuroticism, which measures sensitivity to threat and punishment, is strong in both the British Household Panel Survey and the German Socioeconomic Panel. Neuroticism increases the usually observed concavity of the relationship: individuals with a higher neuroticism score enjoy extra income more than those with a lower score if they are poorer, and enjoy extra income less if they are richer. When the interaction between income and neuroticism is introduced, income does not have a significant effect on its own. To interpret the results, we present a simple model based on Prospect Theory, where we assume that: (i) life satisfaction is dependent on the gap between aspired and realized income, and this is modulated by neuroticism; and (ii) income increases in aspirations with a slope less than unity, so that the gap between aspired and realized income increases with aspirations. From the estimation of this model we argue that poorer individuals tend to over-shoot in their aspirations, while the rich tend to under-shoot. The estimation of the model also shows a substantial effect of traits on income.

Keywords: life satisfaction, income, personality traits, neuroticism, prospect theory

JEL Classification: D03, D87, C33

Suggested Citation

Proto, Eugenio and Rustichini, Aldo, Life Satisfaction, Income and Personality. IZA Discussion Paper No. 8837. Available at SSRN: https://ssrn.com/abstract=2564970

Eugenio Proto (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Aldo Rustichini

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

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