Startups, money, and happiness


A commonly cited Princeton study on money and happiness claims that money correlates to happiness until you reach a 75K/year salary. Past that, money doesn’t make you much happier.

You can argue about locations, standards of living, etc. but I think it is easy to agree that money provides decreasing marginal utility. That is, the amount of happiness you gain per dollar decreases as you make make more money.

People often think about the marginal utility of money with respect to an annual salary, but there is another interesting way to look at it: the marginal utility of money earned in a lifetime. This becomes particularly interesting for people making the decision between their tech job, and their desire to give the entrepreneur/startup thing a try.

Let us use an example of Jeff, a fictional dude that has 30 years of work in him. He has the choice to either work at a company for 30 years, or to give up 5 years of salary to give a startup a try. If we assume Jeff makes the same amount each year (which obviously isn’t true, but please just go along with it for now), Jeff gives up 16.67% of his lifetime income if he goes the startup route.

Is this a good tradeoff?

I’m going to argue that going the startup route is the right decision (granted that deep down, he really wants to try it).

Jeff only needs a certain amount of money in his lifetime before reaching of point of diminishing returns with respect to happiness. At that point, the only way to significantly increase happiness is to significantly increase the total money earned.

If Jeff’s cushy tech job pays anywhere near 6 figures (as many in tech jobs do), he is way above the 75K/year number in the Princeton study. If he gives the startup thing a try, he doesn’t stand to lose much lifetime happiness when reducing his lifetime income by 16.67%.

However, by trying a startup, Jeff gains the chance to significantly increase his happiness in two ways.

First, he gets the chance to chase a dream. The impact to happiness here is hard to measure, but it can be significant. In the short term, there are benefits to having purpose and hope while chasing your dream. In the long term, there are also big benefits. Whether he succeeds or fails, when Jeff is on his death bed, he will be proud that he gave the startup thing a try.

Second, should the startup actually make it big, he has the chance to significantly increase his lifetime earnings. By “significant”, I mean 2x, 5x, 10x , or possibly more. At these multiples, the increase of lifetime earnings can significantly impact your life happiness, and change your life style.

Yes, this example is rough, but it should be enough to get the picture. I believe that for a knowledgable and skilled person who wants to try a startup and optimize for life happiness, the rational decision is to take the plunge and go for it.

Obviously, I would say this because I’ve done it. What do you think? Does it make sense?

P.S. This is post number #80 in a 100 day blogging challenge. See you tomorrow!

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