My favourite things: the relationship between asset classes relationship between asset classes

and satisfaction

Marcia Keegan

Research Fellow

23 March 2012

Which people are happy?

● Young (late teens/early 20s) and older people

● Good health

● Partnered

● Employed happier than unemployed ● Employed happier than unemployed

● Working part-time instead of full-time

● Living in the country

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Economic resources and satisfaction

● “Money can’t buy happiness, but it can buy a better standard of misery”

● Most international research shows that money can buy happiness – that is, people with more money tend to be happierhappier

3

From an international perspective – the 2005 Happy Planet Index

$40,000

$50,000

$60,000

$70,000

GDP per capita ($US, PPP)

Luxembourg

Portugal

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$0

$10,000

$20,000

$30,000

2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Average life satisfaction out of 10

GDP per capita ($US, PPP)

Australia

Tanzania

Portugal

Costa Rica

Income and happiness within countries

● Numerous international studies show that income has a weak but positive and statistically significant relationship with life satisfaction

● The economic theory of ‘diminishing marginal utility of income’ holds true in happiness surveysincome’ holds true in happiness surveys

● Higher incomes allow for higher consumption, a better standard of living, more opportunities for careers, life and leisure, greater ability to weather life shocks

● Social comparison may also have an impact; a person’s income in relation to the average of their peer group also has an impact on life satisfaction

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7.6

7.8

88.2

8.4

Life S

atisfa

ction

From HILDA 2010. Annual household incomes higher than $350 000 were not included due to topcoding.

6

7.6

0 50000 100000 150000 200000 250000 300000 350000$000s

Disposable household income

Wealth and happiness

● With greater availability of detailed survey data, more research has been conducted on the relationship between happiness and other forms of material wellbeing, including wealth and consumption

● Previous international research suggests that the ● Previous international research suggests that the relationship between wealth and happiness is stronger than the relationship between income and happiness

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Data

● Household, Income and Labour Dynamics in Australia Survey, 2010, Wave 10

● Sample for this research included respondents 15 and over

● 6410 males and 7109 females in a total of 7310 households

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Individual happiness, household wealth?

● Satisfaction is measured in individuals, while wealth can be measured at the individual, couple or household level

● Some forms of household wealth predominantly affect the individual (eg savings accounts, superannuation) the individual (eg savings accounts, superannuation) while the benefits of other forms of wealth predominantly affect the entire household (eg owner-occupied dwellings

● This analysis focuses on household wealth and individualhappiness

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Types of wealth considered

● Real property

● Owner occupied dwelling

● Other real property

● Financial assets

● Superannuation

Savings (bank deposits)● Savings (bank deposits)

● Shares

● Debt

● Home mortgage

● Other property mortgage

● Credit card debt

● Other personal debt

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Assets of households, HILDA Wave 10

Family home

Bank accounts

Equities Superannuation

Other real property

Mean value ($000s)

378.36 38.92 37.35 143.74 125.99

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($000s)

% owning asset

63.80 97.59 34.05 80.84 20.25

Mean value ($000s) (ABS)

364.9 32.9 22.3 115.9 136.4

Reference: Author’s calculations based on HILDA survey data, ABS Household Wealth and Wealth Distribution

(2011).

Debts of households, HILDA Wave 10

Home mortgage

Other property mortgage

Credit card debt

Other personal debt

Mean value ($000s)

86.28 34.64 1.84 16.27

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% owing debt

34.74 9.87 26.85 34.78

Mean value ($000s) (ABS)

68.4 36.6 2.6 10.2

Reference: Author’s calculations based on HILDA survey data, ABS Household Wealth and Wealth Distribution

(2011).

Measures of happiness

● HILDA asks respondents to state how satisfied they are with a number of aspects of their lives, on a scale of 0 to 10, where 0 = extremely dissatisfied and 10 = extremely satisfied

● This research focuses on two measures:● This research focuses on two measures:

● Satisfaction with life as a whole

● Satisfaction with one’s financial situation

● These measures are the most relevant to a person’s wealth status

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Most respondents are pretty satisfied with their lifeH

0.1

.2.3

.4D

en

sity

0 2 4 6 8 10K14 How satisfied are you with your life

14

K14 How satisfied are you with your life

0.0

5.1

.15

.2D

en

sity

0 2 4 6 8 10K13 Satisfaction - Your financial situation

Hbut not so satisfied with their financial situation

7.8

88

.28

.4L

ife S

atisfa

ction

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7.6

0 1000000 2000000 3000000 4000000 5000000 6000000 7000000$000s

Gross household wealth

From HILDA 2010. Annual gross household wealth higher than $7 million not included due to topcoding.

Net wealth, financial satisfaction and life satisfaction

1000

1200

1400

1600

Mean net wealth ($000s)

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0

200

400

600

800

0 1 2 3 4 5 6 7 8 9 10

Mean net wealth ($000s)

Satisfaction

Life

Financial situation

Reference: Author’s calculations based on HILDA 2010 survey data.

Methdology

● An ordinal probit model was used to determine the relationship between wealth and satisfaction (dependent variable)

● Due to the curvilinear relationship between wealth and satisfaction, the log of assets and debt were used as explanatory variables

● Other variables used were age, sex, partnership status, single parenthood, health, employment and equivalisedincome

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Results: assets, debt and satisfaction

Overall life satisfaction

Satisfaction with financial situation

Coefficient Standard error Coefficient Standard errorAge ***-0.054 0.005 ***-0.042 0.004Age-squared/100

***0.059 0.006 ***0.051 0.004

Female **0.048 0.020 ***0.053 0.018Diploma/trade qualification

0.050 0.043 ***-0.139 0.031

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qualificationNo post-school ***0.112 0.034 ***-0.122 0.032Health status ***-0.419 0.034 ***-0.253 0.035Partnered ***0.261 0.033 ***0.125 0.033Single parent -0.091 0.066 ***-0.211 0.067Employed -0.041 0.039 ***0.143 0.038Unemployed ***-0.178 0.065 ***-0.659 0.092Equivalised income

***0.001 0.000 ***0.005 0.001

Total assets ***0.032 0.010 ***0.109 0.010Total debt ***-0.011 0.003 ***-0.039 0.004

Effect of assets and debt

● As we would expect, assets are positively associated with life satisfaction and financial satisfaction, while debts are negatively associated with financial and general satisfaction

● Wealth and debt has a stronger association with ● Wealth and debt has a stronger association with financial satisfaction than overall satisfaction

● This relationship exists even when income is controlled for

● Do certain types of assets have a stronger impact on satisfaction than others?

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Why do we have assets?

● Potential capital gain

● Shares, real property, collectibles

● Income stream (or offsetting expenses)

● Shares (dividends), real property (rent or offsetting rental expenses), savings (interest)expenses), savings (interest)

● Store of value

● Collectibles, real property, gold, jewellery

● Sentimental or use benefits

● Own home, collectibles, vehicles, jewellery

● Because different assets have different benefits, some assets may provide more satisfaction than others

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Overall life satisfaction

Satisfaction with financial situation

Coefficient Standard error Coefficient Standard errorAge ***-0.055 0.005 ***-0.039 0.004Age-squared/100 ***0.060 0.006 ***0.048 0.005

Female **0.048 0.020 ***0.053 0.019Diploma/trade qualification

0.063 0.041 **-0.077 0.029

No post-school ***0.121 0.033 *-0.055 0.030Health status -***0.414 0.034 ***-0.233 0.036Partnered ***0.256 0.033 ***0.114 0.034Single parent -0.092 0.068 ***-0.214 0.069Employed -0.035 0.037 ***0.142 0.036Unemployed **-0.176 0.067 ***-0.623 0.097

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Unemployed **-0.176 0.067 ***-0.623 0.097Equivalised income

***0.001 0.000 ***0.004 0.001

Family home ***0.014 0.004 ***0.018 0.004Superannuation 0.005 0.005 *0.008 0.005

Savings 0.000 0.006 ***0.073 0.007Shares 0.003 0.002 ***0.011 0.003Other real property

0.004 0.004 ***0.011 0.003

Home mortgage **-0.009 0.003 ***-0.012 0.003

Other property mortgage

-0.004 0.005 -0.006 0.006

Credit card debt **-0.009 0.004 ***-0.039 0.004

Other debt -0.004 0.003 ***-0.016 0.003

Financial satisfaction

● Savings had the strongest effect on financial satisfaction, followed by wealth in the family home, shares and other real property were equal third

● Superannuation wealth, although being the second-largest wealth store, was barely statistically significantlargest wealth store, was barely statistically significant

● Credit card debt had the biggest impact on financial satisfaction, followed by other debt, then the home mortgage. Mortgages over other real property not significant.

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Life satisfaction

● All assets had a positive impact, all debt had a negative impact, though not all statistically significant

● Family home was the only store of wealth that was statistically significant

● The home mortgage and credit card debt had similar negative and significant impacts on happiness

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Discussion

● Family home has a big impact on satisfaction –threefold benefits in capital gain, rental offset and sentimental or use benefits

● Having cash aside for a rainy day people made people very pleased about their finances, but had no impact at very pleased about their finances, but had no impact at all on life in general

● Superannuation has little to no impact – because it is inaccessible for so many, it almost doesn’t exist?

● Shares and other real property had similar impacts

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Discussion

● Tax deductible debt has less of an impact than non-deductible debt

● Credit cards and home mortgages reduce both life and financial satisfaction

● Mortgages over other property have no impact on either form of satisfaction – part of a specific financial strategy?

● Other debts – may be deductible or not, may be secured or not

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The Paradox of Bliss

● This research and most existing research shows that there is a positive, small and significant relationship between life satisfaction and financial resources

● Money does buy happiness!

● BUTH..

● In most measures of financial resources vs. happiness, people who give themselves a 10 out of 10 for happiness are worse off than people who give themselves a 9 out of 10

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From AMP report 26

Median equivalisedhousehold income by

happiness

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Difference between own median

equivalised HH income and mean of

peer group

From earlier in the presentation

1000

1200

1400

1600

Mean net wealth ($000s)

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0

200

400

600

800

0 1 2 3 4 5 6 7 8 9 10

Mean net wealth ($000s)

Satisfaction

Life

Financial situation

Reference: Author’s calculations based on HILDA 2010 survey data.

The Paradox of Bliss – why?

● Used a subsample of HILDA – everyone who scored 9 or 10 out of 10 in general life satisfaction

● Created a dummy variable ‘bliss’; =1 if life satisfaction = 10, else =0

● 2904 people scored 9, 1536 scored 10 in Wave 10

● Results were surprising – so surprising that a similar result was estimated for the 2006 HILDA for comparison

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Results 2010 2006

Coefficient Standard error Coefficient Standard error

Age -0.007 0.006 **-0.018 0.008

Age-squared/100 0.009 0.007 **0.023 0.009

Female 0.000 0.054 -0.061 0.046

Diploma/trade qualification ***0.321 0.082 ***0.240 0.077qualification ***0.321 0.082 ***0.240 0.077

No post-school ***0.420 0.073 ***0.447 0.078

Health status -0.021 0.082 -0.063 0.071

Partnered *-0.126 0.074 0.035 0.066

Employed **-0.227 0.099 ***-0.181 0.059

Unemployed 0.096 0.164 -0.113 0.126

Equivalised income 0.001 0.001 0.001 0.001

Assets ***-0.060 0.020 ***-0.069 0.018

Debt -0.002 0.007 -0.008 0.006

Constant 0.316 0.261 0.611 0.27830

Why is this?

● People who live simpler lives are happier?

● Less intelligent people didn’t understand the question?

● Less wealthy/educated people have less ambition or drive to further themselves?drive to further themselves?

● ?????

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Conclusions

● Asset type and debt type, as well as total assets and debt, have a statistically significant impact on satisfaction

● Family home and savings have big effects

● Tax-deductible debt has less of an impact than non-deductible debt

● Once a person is already pretty well-off, there may be merit in backing off a little and smelling theroses

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