Does More Money Buy You More Happiness?

Why do we believe that more money will buy us more happiness (when in fact it does not)? In this paper, the authors propose a model to explain this puzzle. The model incorporates both adaptation and social comparison. A rational person who fully accounts for the dynamics of these factors would indeed buy more happiness with money. They argue that projection bias, the tendency to project into the future current reference levels, precludes subjects from correctly calculating the utility obtained from consumption. Projection bias has two effects.