Recently, I read an interesting paper titled “If money doesn’t make you happy, then you probably aren’t spending it right” by Elizabeth Dunn, Daniel Gilbert, and Timothy Wilson. We hear a lot that money can’t buy happiness. Although, it is just common wisdom and not really analyzed scientifically. The authors believe that the relation between money and happiness is not well understood.
The main reason behind poor understanding of happiness is the inability of humans to predict the future events accurately. In other words, we are bad at estimating what will make us happy or sad. Mainly because we are in a different context when making predictions about a future event compared to when we actually experience the event, and our brains have limited capacity.
They propose 8 principles about spending money to increase our happiness. Let’s take a look.
1. Buy more experiences and fewer material goods.
It turns out that buying experiences is slightly more likely to make us happy compared to buying things. Let’s try to understand why that is the case.
First, we adapt to things quickly. Possessing tangible things stop giving us the same amount of happiness after some time. Compared to that, memories of an experience tend to delight us over a long period of time. Second, things bring us happiness only when we use them, not when we are just thinking about them. Experiences bring us happiness in both cases. Finally, things are easier to compare with one another, and experiences are harder to compare.
Having said that, they also mention that we can still get happiness from the things. But instead of thinking about them as something that we possess, we should think about what they enable us to do. For example, we can think about a car as something that enables us to travel from point A to B faster, or allow us to go on a weekend trips. In that case, the model of the car and related features become irrelevant to our happiness because it is now derived from the experience.
2. Use money to benefit others.
Spending money on others makes us happier than spending money on ourselves. One of the reason behind this is that we humans are social creatures (only three other creatures are social: termites, eusocial insects, and naked mole rats). We value social relations. Spending money is a great way to strengthen social relations. So, we should spend more money on buying gifts for our loved ones and donating to the needful.
3. Buy many small pleasures rather than fewer large ones.
The key idea is again based on adaptation. Our brain adapts quickly. Even when we talk about experiences, it is often better to go for multiple small experiences rather than one big experience. The happiness from experiences also suffer from “diminishing marginal utility”. For example, the first bite of a large cookie gives us more pleasure than the subsequent bites. The small experiences are separated by time and hence helps with the adaptation issue. So, when it comes to happiness, the quantity of things or experiences matters more than the quality.
4. Eschew extended warranties and other forms of overpriced insurance.
Another forecasting error we make is how sad we will be if something is taken away from us. Which is why we spend so much money in different forms of insurances. The good news is that we adapt to bad events as well. We all have a psychological immune system that helps us recover from bad events. So, we should avoid buying many unnecessary insurances.
In one of their experiment, they asked some people on a train about how sad they will feel if they missed the train by one minute vs. five. As expected, most people said that they will experience a lot of regret and more sad if they missed it by just one minute. They found that people who actually missed the train by one and five minutes experienced less regret and, more importantly, almost equal regret. They basically blamed something (e.g., traffic) apart from themselves for missing the train. We can see the psychological immune system at work here!
5. Delay consumption.
With the increasing use of credit cards, we don’t think a lot about what we are buying. We just buy things based on the momentary emotions we feel at that time and pay for it later. This results in us making suboptimal choices that are sometimes not good for our health. We can avoid this by deciding what to buy (and paying for it) first, and then consuming the thing. For example, we are far more likely to eat healthy if we have to decide our menu for the next week and pay for it than just deciding what we eat when we are hungry.
This buying behavior also goes against a key source of happiness: anticipation. Paying for things first allows us to anticipate the event that makes us happy. This is a “free” source of happiness. We get the happiness from the better experience (because we analyzed it before selecting) plus the “looking forward to it” part.
6. Pay attention to the details.
We often miss out on the details. For example, when we think about happiness from buying a big house, we often only think about how luxurious we would feel by possessing a giant house. We forget to think about how hard it would be to clean and maintain that house over a long period of time. The authors say, “Over time, psychological distress is predicted better by the hassles and uplifts of daily life than by more major life events”. So, some thinking about the details would help us make a better choice, and we would experience more happiness.
7. Beware of comparison shopping.
Thanks to the growing economy and online shopping options, we have a ton of choices to buy things. But they come at a cost. When we end up looking at so many choices, we end up looking at features that don’t really matter to us. This is a great way of wasting money. We end up paying for the attributes that don’t increase our happiness, and we didn’t even need them in the first place.
Another issue is that the comparison we make while shopping is not the same comparison we make while experiencing. This leads us to make prediction error while estimating the amount of happiness we would get.
8. Follow the herd instead of your head.
We have powerful brains. But they are not strong enough to solve the complex system of evaluating happiness. The idea is that, we should trust the reviews more than our predictions. Our predictions of happiness is usually derived from several attributes we see. They might not be enough to predict the happiness accurately. Compared to that, people reviews can provide additional information about the source of happiness. They can tell us what exactly made them happy, or what exactly will make us happy after buying a thing.
In conclusion, people with more money are often very satisfied, but not necessarily happy. And the reason of their unhappiness is not that the money can’t buy happiness, but the fact that they don’t understand how happiness works and hence are unable to spend the money to gain happiness. Understanding these experimentally proven principles will help us spend money the right way!
Reference: Dunn, E. W., Gilbert, D. T., & Wilson, T. D. (2011). If money doesn't make you happy, then you probably aren't spending it right. Journal of Consumer Psychology, 21(2), 115–125. https://doi.org/10.1016/j.jcps.2011.02.002
Video: True privacy screen
Quote: “If you are insecure, guess what? The rest of the world is, too. Do not overestimate the competition and underestimate yourself. You are better than you think.” ― Timothy Ferriss, The 4-Hour Workweek