A Dynamic Model on Happiness and Exogenous Wealth Shock: The Case of Lottery Winners

The sudden acquisition of a large sum of money, known as “wealth shock,” can have unanticipated negative consequences, and actually cause greater unhappiness in its so-called beneficiaries. There is extensive economic literature describing these negative consequences on a macro-economic level, but there is no coherent theoretical model that describes the various consequences of wealth shock on a micro-economic level. To explain both the short- and long-term effects of an exogenous monetary shock (for example, winning a lottery) on individual happiness, this paper offers a novel dynamic equilibrium model of human happiness. A dynamic equilibrium model is best suited for this purpose, because happiness is a dynamic process. The proposed model captures both short- and long-term effects, and describes an equilibrium in which a person’s experienced utility and happiness is improved after the sudden wealth shock, and why at the saddle point, life can become sadder and more miserable. The conditions detrimental to winners’ happiness include reducing the amount of time and effort they allocate to preserving their stock of hedonic capital.