The 'Diminishing Marginal Utility' of Wealth

"Contentment is natural wealth, luxury is artificial poverty." ~ Socrates

Does quality increase with quantity?  Once our physiological needs are met, can more money bring more happiness?  If we are already "satisfied," why do we consume more?  Can we possibly become "more satisfied?" 

While individual consumers may not have an economic measure of satisfaction, Economists, as you would imagine, do have one for consumers:  It is called utility.  In economics, total utility is essentially the "sum of satisfaction or benefit that an individual gains from consuming a given amount of goods or services..." There is, of course, a certain level of consumption at which we become "satisfied" and our desire to consume more begins to diminish.  Accordingly, the price you are willing to pay for more of the product or service also diminishes.  This summarizes the Law of Diminishing Marginal Utility.

"Freedom is not procured by a full enjoyment of what is desired, but by controlling the desire." ~ Epictetus

We humans can really get ourselves into trouble when we plot a course to obtain the object of our desire when we are "hungry," which is a point long before our utility begins to diminish -- when we perceive a need for satisfaction that may be much larger than is required to obtain the satisfaction: Have you ever gone grocery shopping on an empty stomach?  Do you go to the "all-you-can-eat" buffet for a nice little salad or do you go when you are ready to eat twice your weight in food?  Do you wait until you are thirsty to drink?  You get the picture...

While one could certainly cite some examples where desire can be leveraged for benefit, buying behavior is much less controllable when our desire is strongest, and it takes little persuasion to get us to buy twice as much as we really need, especially in the absence of self-awareness... For example, economists (and marketing managers at 7-Eleven) know that you may be willing to pay $1.50 for a 16-ounce "medium" soft drink; but you are not willing to pay $3.00 (twice as much) for twice the size; however, you will pay $1.99 for the 32-ounce "Big Gulp," even though you do not "need" the extra 16 ounces.  After all, it's "just 49 cents more" for twice the size!Economists see the diminishing marginal utility as the consumer's decreasing willingness to pay more money for the same incremental increase in units of a product or service.  The problem, however, is that our willingness to pay and consume more should stop at 'satisfactory,' not just diminish.  Making matters worse, we do not often make decisions about our future when we are already satisfied or content, primarily because we are never satisfied or content! It may be time to enlist the help of philosophy here...

"Let no one delay the study of philosophy when young nor weary of it when old." ~ Epicurus

As you would imagine, the law of diminishing marginal utility also translates to our inability to predict our happiness, especially when it comes to money. A contentment quote from Lau-Tzu would be too easy here -- So I dug up a philosophy gem from a lesser known philosopher, Jeremy Bentham, dating back nearly 200 years, which illustrates what an economist today might call the diminishing marginal utility of wealth: 

So far as depends on wealth, -- of two persons having unequal fortunes, he who has most wealth must by a legislator be regarded as having most happiness.

But the quantity of happiness will not go on increasing in anything near the same proportion as the quantity of wealth...

The effect of wealth in the production of happiness goes on diminishing, as the quantity by which the wealth of one man exceeds that of another goes on increasing: in other words, the quantity of happiness produced by a particle of wealth (each particle being of the same magnitude) will be less and less at every particle; the second will produce less than the first, the third than the second, and so on. ~ Jeremy Bentham (1748 - 1832), 'Pannamonial Fragments', Works, III, p. 228 

Recent studies in behavioral finance illustrate the point that the wealthiest nations are not the happiest.  When we have little money, we tell ourselves that "more money" will bring us "more happiness."  To a certain degree, this is true, if your life depends on it:  Humans, at a minimum, require food, shelter and clothing to meet their basic physiological needs, and money is the primary means to acquire these basic needs.  The point at which these needs are met, however, is where our utility for money begins to diminish -- yet we move beyond our physiological needs and convince ourselves that greater monetary wealth will meet our ever-increasing needs for "happiness" as well... -----------------------------------------------------------

Related Posts:

How Much is 'Enough?'

The secret to happiness is... no secret

The 'Experience-Stretching Hypothesis'

Comments

[Next Gen Politics]

I read this post yesterday and couldn't remember if I responded or not. I'm on vacation, so I guess that may be a reason...lol.
What I wanted to say was that I have been reading about a similar idea recently on another post. www.buddinggardener.com. There the author has been part of a "100 things" challenge, which serves a similar, purpose. By reducing the "things" you own, you can thereby increase the overall worth of the things you keep. It's an interesting idea, as is your article. I really enjoy coming here and reading your posts, and I just wanted to say thanks for all your hard work. As a side note, I have written a post about my favorite blogs, and I put a link to your blog in my post. I hope you don't mind. Keep up the good work. I finally figured out what a "reader" was, and you were one of the first sites I entered. Have a great week.

Jerame Clough
-Next Gen Politics

[The Financial Philosopher]

Thanks Jerame:

Philosophy certainly has taught me that words, such as wealth and freedom, have so many different meanings to so many different people that the words become almost without meaning -- they become abstract.

The terms wealth and freedom are quite often mistakenly tied to eachother.

I believe wealth does not provide freedom BY money, but wealth is actually better defined as freedom FROM money.

The paradox that arises is that the more monetary wealth we obtain, the less freedom we possess.

Thanks for the comment and for being a "reader!"

Enjoy your vacation...

Cheers...

Kent

[Frank Farbenbloom]

Coincidentaly last evening on TV, I heard Warren Buffet address this question when answering a group of students at Nebraska U.

Happiness, Buffet said, "... when you get to my age" comes from being surrounded by people, family, friends and colleagues, who care about and LIKE you.

He went on to say that he knows many including Forbes 400 members who get honors and acclaim, have building named after them and dinners given in their honor but "no one really likes them!"

Maimonides about 800 years ago spoke of how man engages in economic activity in order to take care of his family's material needs. However, he goes on to say, too often man forgets the original need, getting caught up in making money for the sake of making money.

My late father-in-law in his 94 years, never had much money but left a legacy of love,knowledge and respect among the hundreds who had the privilege of knowing him. It is a priceless legacy reaching down to his great-granchildren.

Thanks for another thoughtful posting.

[The Financial Philosopher]

Frank:

My personal lesson on this subject began the day my 4-year old son asked me why I was away from the family so much. I told him that I was "earning money for the family so we can pay for all of our things..."

He said, "I'd rather have my Daddy than money." That day I began a plan to start my own business...

It is now three years later and I am succesfully self-employed and I spend more time with my family than ever before...

Thanks for taking time to make a thoughtful comment...

Kent (The Financial Philosopher)

[Aaron Pinkston]

Kent, this was very timely since I was doing a lot of thinking about the diminishing utility of information back when you posted this. In particular, how it impacts or sustains markets with asymmetric information. Maybe there's another post in that idea.

Here's some Nobel Prize winning links on asymmetry:
http://nobelprize.org/nobel_prizes/economics/laureates/2001/ecoadv.pdf
http://nobelprize.org/nobel_prizes/economics/laureates/1996/press.html

[The Financial Philosopher]

Thanks, Aaron...

I will take a look at the links.

Kent

[Isak]

These are not Nobel Prize winning links, but here are some thoughts that develop this idea a little further, use it to demonstrate why gambling is typically irrational, and suggest/develop applications of this idea in taxing and trading:
1. http://www.du-preez.com/2011/quantitative-finance/utility-function-of-wealth
2. http://www.du-preez.com/2011/quantitative-finance/logarithmic-utility-of-wealth
3. http://www.du-preez.com/2011/quantitative-finance/optimal-market-exposure