Money doesn't buy you happiness (or does it?)

As an affluent person, you’ve probably heard this cliché many times. You might even have impressed it upon your children. But is it really true? The answer, as you might expect, is – it depends. Studies show that it’s your relationship with wealth that determines whether it brings you happiness or not.

One of the best benefits that wealth provides is autonomy, or put simply, choice. Freedom to choose has long been acknowledged as a driver of wellbeing. Financial success allows you to determine how you spend your time, where you live, when and where you holiday, which schools educate your children, and where you receive medical treatment. These are distinct advantages afforded to the well-off. Indeed, you may remember a time when you enjoyed less wealth and may have experienced the associated stress of not always being in control of your life choices.

But how much wealth really makes you happy? The overwhelming evidence points to sufficient prosperity for a comfortable standard of living. This might include a reasonably sized house with an affordable mortgage, a modern car and the ability to go away on holiday. However, multiple residences and access to a private jet don’t – in themselves – seem to increase happiness.

This is supported by several studies attempting to correlate high income and happiness. Compelling research conducted by Jonathan Gardner and Andrew Oswald [1]demonstrates the benefit of being comfortable. They wanted to measure the impact a medium-sized lottery win (up to USD250,000 [2]) had on an individual’s happiness. After studying 137 winners with two control groups (one with very small wins and another with none at all), they established a significant positive relationship with wellbeing. The explanation was that the medium-sized prize enabled the winner to cross the threshold from financial discomfort to comfort. However, this positive correlation with happiness is not observed when people gain much larger levels of money, and therefore move from the realm of comfortable to wealthy.

Having said this, we’re not suggesting that giving up your assets will make you happier or that wealth is bad for happiness in itself. Not at all. But, pursuing further riches as a catalyst for increased happiness is simply a flawed concept. Having more wealth, in isolation, will not make you happier.

So, what are the pitfalls of wealth? Why might aspects of prosperity cause you to be less content? The evidence points to two dangers – comparison and consumption. It’s important for us to explore these concepts further.

The antidotes of happiness – comparison and consumption

“A house may be large or small. As long as the neighbouring houses are likewise small, it satisfies all social requirement for a residence. But let there arise next to the little house, a palace, and the little house shrinks to a hut.”

Karl Marx

It was a very different world when the philosopher, sociologist and economic historian Karl Marx wrote these words back in 1847.  However, economists and psychologists have consistently proven his proposition to be valid. Over comparison with others, and the associated conspicuous consumption, are proven routes to unhappiness and dissatisfaction.

The German economist, Rainer Winkelmann, explored car ownership in Swiss cantons. He used the prevalence of Ferraris and Porsches as a proxy for luxury consumption in a particular area. Winkelmann found that increased ownership of these brands led to decreased financial satisfaction within the canton – irrespective of absolute income levels. Being surrounded by lots of luxury cars made people unhappy with their own situation.[3]

Similarly, the American economist, Peter Kuhn, examined the impact of living in a winning postcode area for the Dutch postcode lottery. The subjects had not bought a ticket, so they received no benefit from their neighbours’ good fortune. These non-winners spent more money on cars and exterior house decoration than the relevant control groups. They were literally keeping up with their luckier neighbours.[4]

In his article “How not to buy happiness”, another leading American economist, Robert Frank, described how individuals made hypothetical decisions about their living environment. They could choose to live in:

(1)   A neighbourhood where everyone had a house of 3,000 square feet

(2)   An area where neighbours had houses of 5,000 square feet, whilst they had a house of 4,000 square feet

Even though participants could have one third more space themselves in option (2), they overwhelmingly selected option (1). They were prepared to accept a smaller house rather than see others have more space than they did.[5]

This effect has been replicated in very different parts of the world. The behavioural scientists Christopher Hsee, Fei Xu and Ningyu Tang studied how individuals felt about their jewellery collection across 31 Chinese cities. Those residing in more affluent cities, with generally more expensive jewellery collections, were on average no more satisfied than those with less valuable collections in poorer cities. People were, in effect, happy with their lot. But, looking within any individual conurbations, those with more expensive jewellery reported much greater satisfaction than their neighbours. In other words, the ability to compare your jewellery favourably against others in your area gave a sense of positive satisfaction. People want to feel richer than their peers.[6]

The economists Neumark and Postelwaite found similar effects when examining the reasons for women re-entering the workplace, say after childbirth. One phenomenon they uncovered was that when a woman’s sister’s husband earned more than her own spouse, the chances of a woman returning to work increased. The women studied did not want to be worse off than those around them – even their immediate family.[7]

Coming back to Marx’s quotation above, an idiom in the English-speaking world sums this up as “keeping up with the Joneses”. In other words, the desire to match and exceed the wealth and lifestyle of neighbours, friends and family. This is the cause of much unhappiness and futility in people’s lives, irrespective of their absolute wealth level.

Having examined the evidence, the psychologists Elizabeth Dunn, Daniel Gilbert and Timothy Wilson tried to make sense of these dimensions in their article, “If money doesn’t make you happy, then you probably aren’t spending it right”. [8] They proposed some sensible principles that, through our own observations, we believe you may find useful:

• Focus more on social experiences than the acquisition of “things”

  “Go out and buy yourself something nice” is commonly offered as an antidote to bad news. This advice is sadly misguided. The evidence actually points strongly to the idea that an experience, especially a social one, will have a much greater impact on prolonged happiness than the equivalent money spent on a material item. So, a holiday with friends, the enjoyment of a meal in a fine restaurant, or a visit to a theme park or cultural event will provide longer-lasting happiness. We can illustrate this with a study that asked one thousand Americans to consider purchasing a material item or an experience. When invited to articulate the subsequent imagined emotions, 57% of participants reported happiness resulting from the purchase of an experience, and just 34% reported happiness from the purchase of a material item.

  
  

  Indeed, a focus on material objects – let’s call it a materialistic mindset – has been shown to diminish happiness levels, lead to feelings of anxiety and depression, make people less satisfied with life, and even correlate with minor physical illnesses (e.g. headaches). These findings are repeatedly found in rich and poor, young and old, and all around the world. In young adults, specifically, placing a high priority on material possessions has been associated with significantly increased risk for a whole plethora of psychological illnesses, both psychiatric and personality related. The literature comprehensively shows the pursuit of “things” tends to disappoint, whilst social experiences bring a much greater likelihood of pleasure.

  
  

• Focus more spending on others, rather than yourself

  As fundamentally social beings, we invariably develop complex networks and relationships. In building these, including how we spend our money, we often receive emotional pleasure in return. A couple of studies demonstrate this. In one, a nationally representative sample of Americans had their expenditure divided between personal spending (e.g. bills, clothes, consumption) and gifts for others (friends or charity). After controlling for all other variables, those who assigned a greater proportion to gifts were simply happier.

  
  

  In another study, Canadian students were given a sum of money and told to spend it on either themselves or others that day. In the evening, those instructed to spend the money on others were (again) overwhelmingly happier. Interestingly, it’s worth noting that other research has underlined a forecasting error here. When asked, the majority of people believe they will receive more happiness from spending money on themselves, rather than others, although the opposite is actually true. This is an important lesson. It’s instinct you need to overcome if you want to increase your happiness.

  
  

• Focus more on many smaller pleasures, rather than a few bigger ones

  From your own experience, it will be evident that the marginal utility of pleasure doesn’t always increase proportionately. For example, a 12 oz cookie is unlikely to deliver twice the pleasure of a 6 oz one. Whilst a USD200 bottle of wine might provide considerably more enjoyment than a USD50 bottle, wine costing USD350 is unlikely to deliver the same uplift in satisfaction. However pleasurable, we all know flying first class over business class doesn’t provide the same improvement in wellbeing as travelling business class instead of economy class. Of course, we’re not suggesting there’s anything wrong with spending money on expensive alcohol or first-class air travel. Rather, that larger pleasures should not always be prioritised over smaller treats. It’s the minor luxuries that deliver a greater chance of providing everyday contentment. So don’t be seduced by price, and really reflect on what makes you happy.

  
  

• Focus more on paying now and consuming later (rather than the opposite)

  In an age of consumption, people want what they want, and they want it NOW! Or, at least as soon as possible. This has manifested itself in same-day deliveries and buy now/pay later schemes. Again, these are not bad in themselves. They can reduce inconvenience and wasting time or utility. But, cast your mind back to waiting for your birthday as a child. Remember the expectation of gifts and celebrations, counting down the days, and the build-up of excitement. It was as if the anticipation added to your enjoyment, perhaps even prolonged it.

  
  

  In their study of meaningful life events, a group of psychologists studied people’s emotions before an exciting vacation. They found that the anticipation of their holidays provided considerable additional pleasure to the participants. The events themselves were actually often marred with disappointment (e.g. a delay or disagreement). A more positive “rosy view” was restored when the returning holidaymakers reflected on their vacation with hindsight. In other words, the period before the event – the anticipation phase – was notably important for the overall enjoyment of the experience.  The psychologist Fred Bryant took it one step further and discovered that active anticipation (in other words, choosing to anticipate) increased overall happiness and satisfaction with the event.[9]

This recognition that expectation is enjoyable already pervades our thinking, demonstrated by the desire to let your mind wander and imagine possibilities. In a somewhat audacious study, the behavioural economist George Lowenstein [10] offered participants the (figurative) opportunity to pay for a kiss with their favourite celebrity. He found that the participants were willing to pay much more for a kiss in three days rather than one in the next three hours. They wanted to enjoy that anticipation – and, perhaps, optimise their kissing technique! [11]

But can delayed consumption lead to better decision-making? It seems that it can, potentially, stimulate reflection that goes beyond the feelings of that very moment. When thinking about “vices” that might be attractive, it can lead you to reflect more objectively on their true merits. This was illustrated in an experiment offering participants a choice from a selection of snacks. Participants, overwhelmingly, selected an unhealthy option (e.g. a chocolate bar) if it had to be consumed immediately. Conversely, they opted for a healthier snack (e.g. fruit) if it was a choice for the following week. So perhaps making a decision not driven by the emotions of the moment can lead to better judgement?

We believe all these examples suggest that you slow down your decision-making, adopt a strategy of considered reflection and, where possible, delay gratification.

Conclusion

So, hopefully, you agree that happiness is important. We’ve tried to illustrate how it can bring you profound benefits – a longer, healthier life, increased productivity and innovation, and better social relationships. To achieve a greater state of contentment, it’s essential to avoid the dominance of comparison and consumption in your life and consider how experiences will bring you greater satisfaction than material items. Having wealth affords you the opportunity and autonomy to make the right choices.

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References

[1] Gardner, J. and Oswald, A.J., 2007. Money and mental wellbeing: A longitudinal study of medium-sized lottery wins. Journal of health economics, 26(1), pp.49-60.

[2] In today’s money

[3] Winkelmann, R., 2012. Conspicuous consumption and satisfaction. Journal of economic psychology, 33(1), pp.183-191.

[4] Kuhn, P., Kooreman, P., Soetevent, A. and Kapteyn, A., 2011. The effects of lottery prizes on winners and their neighbors: Evidence from the Dutch postcode lottery. American Economic Review, 101(5), pp.2226-47.

[5] Frank RH., 1997. The frame of reference as a public good. The Economic Journal, Nov 1;107(445):1832-47.

[6] Hsee, C.K., Xu, F. and Tang, N., 2008. Two recommendations on the pursuit of happiness. The journal of legal studies, 37(S2), pp.S115-S132.

[7] Neumark, D. and Postlewaite, A., 1998. Relative income concerns and the rise in married women's employment. Journal of Public Economics, 70(1), pp.157-183.

[8] Dunn, E.W., Gilbert, D.T. and 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), pp.115-125.

[9] Bryant, F.B., Chadwick, E.D. and Kluwe, K., 2011. Understanding the processes that regulate positive emotional experience: Unsolved problems and future directions for theory and research on savoring. International Journal of Wellbeing, 1(1).

[10] George Lowenstein is credited as one of the co-founders of behavioural economics as a discipline, and also happens to be the great-grandson of Sigmund Freud.

[11] Loewenstein, G., 1987. Anticipation and the valuation of delayed consumption. The Economic Journal, 97(387), pp.666-684.