Putting Price-tags on Friends…Literally

While finishing off the fourth chapter of my book (in which I explore the links between happiness and grades) I came across an interesting academic paper written by Nattavudh Powdthavee, a socio-economist at the University of York. The paper is titled, ‘Putting a Price Tag on Friends, Relatives and Neighbours’ and in it, Powdthavee uses a method called shadow pricing to assign monetary values to a number of social phenomenon.

Shadow Pricing Explained

How does shadow pricing work? The statistical maths behind it is a little complicated but the basic idea can be illustrated with the following example: Let’s say you are earning £10,000 a year. At this point you may rate your happiness to be a six, on a scale of one to ten. However, the following year you get promoted and your salary is increased to £30,000. When you are asked how happy you are, you now reply with a happiness rating of eight. Assuming nothing else contributed to your happiness, one could infer that to increase your happiness by two points you require £20,000. Now, what if in another situation instead of an increase in salary, you got married and your happiness did also move from six to eight. One could then infer that the shadow price of marriage is £20,000.

Powdthavee’s methadology is more sophisticated than my example implies, and uses data from the British Household Panel Survery, which includes over 10,000 randomly selected individuals. What you get from such enormous data are estimates and valuations which are eye-opening. Powdthavee estimates, for instance, that if you move from seeing your friends or relatives less than once a month to seeing them on most days (more than twice a week), your life satisfaction could improve just as much as if you were handed £85,000!

What is the significance of this number? And why should we put ‘price-tags’ on friends? Well, for one, this figure is a reminder of how important it is to have a healthy social life if you want to be happy (and don’t forget, happy people often outperform sad people in a number of fields, including education). Secondly, such estimates can help with decision making. For example, when you graduate you might be faced with the dilemma of choosing between a high-paying job which requires you to relocate far away from your friends and relatives, and a lower-paying job nearer home. But with a monetary estimate of how much your social life is worth, you can make better-informed decisions in situations such as these.

Here are few other interesting estimates in Powdthavee’s paper (the reds are negative values):

• Seeing friends/relatives once or twice a month: £57,500
• Seeing friends/relatives once or twice a week: £69,500
• Seeing friends/relatives on most days: £85,500
• Marriage: £50,500
• Living as a couple: £82,500
• Unemployed: £143,000