How spending money can create happiness – Part 1

As a follow-up to my recent post on “Income and Happiness”, I thought I would delve deeper into the link between money and happiness.  Specifically, is there a way to spend money that makes one happy?

Brainstorming the ways spending money makes me happy before doing a literature search I came up with these in no particular order:

  1. Paying down debt
  2. Giving to charity
  3. Giving to friend/family in need (within limits)
  4. Treating friends and family to experiences
  5. Saving for retirement
  6. Travel including upgrades to more comfortable airlines seats, larger rental cars and better hotels
  7. Going on dates including babysitter
  8. Buying children, wife, friends and family and self small things of high value

These things we spend money on either make me unhappy or neutral

  1. Large poorly thought out purchases
  2. Home costs on our second (accidental) home
  3. Disability insurance because its so expensive
  4. Extended channel satellite TV (winters are brutal here so neutral)
  5. Daycare in an understaffed market
  6. Taxes

Now to the literature search.  There are several relevant articles, but an easy to read review style article was published in the Journal of Consumer Psychology 2011 by Elizabeth Dunn et al.   The title is “If money doesn’t make you happy, you probably aren’t spending it right”.

The authors claim, like many in the happiness literature, that humans do not know what makes them happy, how happy something will make them and how to sustain happiness once found.  They postulate that money is an opportunity for happiness; an opportunity often squandered.

The reason for human inability to find and sustain happiness is, as they say, our inability to predict the hedonic consequences of future events.  This forecasting how we will feel is called affective forecasting and the literature is replete with studies showing our poor ability.

Errors in affective forecasting are caused from 2 basic sources:

  1. Mental simulations of future events are imperfect.  That is, people don’t anticipate the ease of adaptation to positive (hedonic)  and negative circumstance.  We don’t understand factors governing the speed of that adaptation.  We are not sensitive enough to the lack of detail in mental simulations.   For example, I live in a cold climate and during the winter think living in California will make me happy.  I fail to recognize that I will likely adapt to some degree to the nice weather.  I also may not factor in the higher taxes, traffic, cost of living, proximity to family, etc that living in California will have.
  2. Context.  The context of the simulation is far different than the context of the actual experience.  I simply cannot take my current life and shift it to California without major change.  I think of this similar to the Heisenburg Uncertainty Principal.  You can’t know the position of an electron without shining a light on it, but once you shine a light on it, the light disturbs the electron and it’s no longer in the position that you were concerned with.  Visualize a future time with current thoughts, get to that future time and old current thoughts are changed.

Fortunately the authors searched the affective forecasting literature and devised eight evidence based principles to remedy our shortcomings regarding money and happiness.  Here they are!

Buy experiences instead of things

Material and experiential purchases were compared among the same person for happiness generated and 57% derived greater happiness from the experiential with 34% from the material.   A major reason for this finding is that people adapt most quickly to that which doesn’t change.  The granite counter tops are the same every morning, but the sunset in Kauai with a champagne in hand with your spouse is a memory which changes with time, and so delays hedonic adaptation.  Additionally, experiences can be shared which tends to increase happiness.

An important note on material possessions.  We need them, no doubt about it – house, car, clothes, sofa, 80 inch HDTV.  However, If one can think of them as enabling us to do something instead of just something we have, this may serve to increase happiness.  The house enables us to raise a family, the car to go on trips, the TV to bond over movies and sports, etc.  However, I don’t have a use for Julio Jones’ $150K diamond earring he lost while Jet Skiing.  

It’s so big it hurts my ear.


Help others instead of yourself

Humans are “hypersocial”.   Anything we do to increase social connections can bring us happiness, including spending money.   Higher happiness is reported for those spending on gifts for others and donation to charity rather than bills and expenses and gifts for self while controlling for other factors.  This is called prosocial spending.

University students were given $20 and randomly allocation to spend on self or others.  When contacted that evening, those who spend on others reported greater happiness.  Also, reflection on past money spent on others brought great happiness than money spent on self.

Functional MRI also shows activation in brain areas associated with reward when giving money to others, even when forced (do taxes count?).

The authors mention that those who “think about money” may be less likely to give it to others.  It possible this reflects a self-preservation of a typically scarce resource.  So stop checking your networth and perhaps it’s better to automate charity, or just have a few beers to lower inhibitions and write some checks!

Buy many small pleasures instead of a few ones

Adaptation to pleasure limits our ability to derive constant pleasure from single large purchases.  The adaptation is courtesy of evolution.  If the pleasure from experience never faded, we would never seek that pleasure. Have sex and enjoy it?  Well, that won’t last and you’ll want more so as to pass on your genes.

Apparently, the easier an event is to explain, the more likely we are to adapt.   We can change some variables to delay adaptation.   These are novelty (never seen it before), surprise (didn’t expect it), uncertainty (not sure what it is) and variability (it keeps changing).  The granite counter-top satisfies novelty only, which is probably why we adapt to such things quickly.  However, the morning run with the running group has a different group each week (novelty), different route (variability) and may not even happen with weather (surprise).  Sounds like a recipe for delayed adaptation.

Another advantage of small pleasures is that they are less susceptible to diminishing marginal utility.  Basically, most of the pleasure of an event is gained from the early part of the experience.  The later parts give less pleasure per unit experience.  (The Happy Philosopher wrote a great post on the subject here).

So that huge 3 week vacation is probably most interesting the first week.  The authors suggest breaking up experiences into smaller parts.   This is called “segregation”.

Segregation – save some for later.

Buy Less Insurance

Just as humans adapt to good things, so to do we adapt to bad things, even major events like accidents, natural disaster, war.  However, we tend to underestimate our ability to adapt to bad events.  Businesses prey on this by offering insurance for anything we want to insure, making us think that buying that insurance is the only way to prevent the unhappiness associated with a loss.  This plays into loss aversion which is the tendency of humans to experience more pain from a loss than pleasure from the same magnitude gain.

We fear the future loss such that we overbuy and overpay for extended warranties and other unnecessary forms of insurance.  Why pay 10% the cost of an item for insurance when there is only a 1% chance of the item breaking, and of the 1% chance there is a 90% chance it could be repaired for far less than the cost of the policy?  Doesn’t make much sense right?  But our brains don’t see it that way thanks to loss aversion.

I’ll continue with the final 4 on Part 2.  Hope you learn something.

4 Replies to “How spending money can create happiness – Part 1”

  1. I agree with you wholeheartedly on point #4. I was just purchasing plane tickets today, and I was shocked that anyone would pay up to $250 to insure a $900 purchase. I’ve been flying regularly as an adult for 22 years, and I’ve missed a flight exactly once, and that was because my mom booked it for the wrong date. I shudder to think how much I could’ve wasted on trip cancellation insurance over all that time.

    1. That’s another good example of a mostly unnecessary insurance. Our credit card (Barclays MasterCard) allows us to have trip insurance if we book with the card and fulfill certain criteria which are similar to the trip insurance policy.
      Loss aversion is something we have to acknowledge to avoid. It’s also why people tend to sell stocks on the way down and watch investments like hawks.
      Thanks for the comment!

  2. Oh man….segregation of fun…sounds like quite a boring lump….

    I do believe in the cost of diminishing return. That first cookie is delicious but the 4th just seems blah…so maybe the same works for long trips. Still I dream of the 3 month sabbatical.

    I am a proponent on spending on what makes us happy. For us that is food and travel. We try to keep our physical property to a minimum (except for the house….way too much house). It keeps us lighter on our feet and the need for less upkeep.

    1. Food and travel for us too, and minimal property. Seems like that fits with experiential purchasing mentioned in the paper. It’s a good problem for us docs to have, basically more money than we can spend so we need to think about how to spend it. Probably seems very “first world”. I guess donation keeps things in perspective, and paying LOTS of income tax is sort of like donation.

      I’m from Louisiana btw, lived in New Orleans for grad school. I like that you like in Cali but long for the NOLA. It’s a good place.

      Thanks for commenting! I enjoy your blog.

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