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Happy Money

The Science of Smarter Spending

Michael Norton with Elizabeth Dunn

We live in America with two bits of contradictory received wisdom - that you'd be a lot better off if you made more money, and that money can't buy you happiness. Now two scholars suggest another way of thinking about the relationship between cash and joy: To a large degree, how you spend is just as important as how much you spend. Michael Norton, an associate professor at Harvard Business School and coauthor - with Elizabeth Dunn - of Happy Money: The Science of Smarter Spending, answered questions from Mind Matters editor Gareth Cook.

Gareth Cook: What is the biggest misconception people have about the relationship between money and happiness?

Michael Norton: One of the things that my coauthor Liz Dunn and I hear again and again when we ask people about money and happiness is a simple phrase: more is better. In general, we all believe that having more money is going to make us happier. And, while it's true that having more money doesn't usually make us less happy, it's also true that simply having more money doesn't guarantee happiness. After all, most of us have a friend, family member, or coworker who is relatively wealthy who certainly doesn't strike us as particularly happy.

We suggest that people should stop thinking exclusively about how to get more money, and instead focus more on whether they are getting the most happiness out of the money they already have.

Cook: You write that people should 'buy experiences.' Why do you say that?

Norton: When we ask people to list all of their expenses in a given month, and then categorize them, it is always striking how much of their budget goes toward buying what we call - using the scientific term - stuff. Gadgets, music, books, lattes, and so on. As it turns out, buying stuff is not bad for our happiness - buying coffees and cars and even houses don't make us unhappy - but stuff also doesn't make us any happier.

Buying experiences, in comparison, does seem to create more happiness for every dollar spent. Why? Consider the difference between buying a TV and buying a vacation. TV is great, sure, but the experience of watching TV pales in comparison to the experience of going to a special meal once a week with a partner or friend. A $4,000 high-end TV may seem like a great purchase, but taking that chunk of cash and devoting it to buying experiences (say, 40 wonderful meals that cost $100 each) creates much more happiness. And what's more, we watch TV alone, but we eat dinner with others. The increase in social interaction - a key predictor of people's happiness - means that experiences generally offer greater happiness bang for the buck than material goods.

Cook: What advice do you have for people planning a summer vacation? What can they do to get the most happiness out of it for the money?

Norton: There's a funny thing about vacations: we often experience one of the biggest increases in happiness in the weeks before the vacation begins. This seems odd - after all, the purpose of a vacation is to go away and be happy - but it speaks to the power of anticipation. Yes, it can be hard to wait for things (think of children in the days leading up to Christmas) but research shows that anticipation is a huge and often untapped source of happiness. Vacations are great, but looking forward to that sunny beach while trapped in an office cubicle can be nearly as exciting and interesting as the beach itself.

Given this, how do we maximize the happiness we get from our vacations? While we're often tempted to put the trip on a credit card and pay it off months after the trip, we suggest a new strategy: pay now, and consume later. Imagine a vacation where you had to pay for every single bite of food you took, with a man standing next to you and making you fork over a dollar each bite. Not. Much. Fun. But when we pay for things up front, by the time they come around they actually feel free - because the pain of paying is so far in the past, we can truly enjoy the moment. And of course, paying up front also increases the likelihood that we will spend the time before the vacation daydreaming about it. Our employers might not be pleased, but that anticipation increases our happiness.

Cook: There are many people who earn a lot of money, but then have no time to enjoy it. How do you think about the trade-off between time and money, and what advice do you have for people as they plan the broad contours of their life?

Norton: One of the biggest mistakes we all make with our money is that we fail to use it in ways that maximize the amount of time we spend engaged in activities that make us happy. Instead, we often accidentally use money in ways that seem like they will make us happy, but instead doom us to unhappy time.

Take buying a nice house in the suburbs. It seems like a great idea. In fact most Americans see owning a house as a key part of living the American dream. And when you buy a house in the 'burbs, you're thinking of all the family barbecues you'll have on the lawn. But what you're not thinking enough about is the fact that you've just doomed yourself to a two-hour commute - in heavy traffic - every day for the rest of your life. Would having a large house be enough to make you happy at the end of a long day when you'd spent two hours in standstill traffic? Our guess is, not so much. And so in general, thinking about how every purchase you make is going to affect your time allows us to spend money in ways that buy us happier time.

Cook: OK, talk to me about Sarah Silverman.

Norton: Sarah Silverman is a personal hero of ours, not just because she's talented and hilarious, but because her philosophy of comedy contains nuggets of wisdom that we all can apply to our own happiness.

Silverman loves, loves, loves one kind of joke over all others: fart jokes. As a result, rather than get sick and tired of the thing she loves, she demands that her writers use fart jokes sparingly. This way, when one comes up, it feels like a treat instead of like a routine.

Aside from fart jokes, a large body of research suggests the value of what we call 'Make it a Treat.' By limiting our access to certain products, we enhance our consumption greatly once we encounter those products again. In one experiment of ours, some people were assigned to eat chocolate every day for a week; others were asked to abstain from chocolate. When they came back a week later, we gave them more chocolate to eat. Nobody hated the chocolate - it was chocolate, after all - but those who had given it up for the week enjoyed the chocolate much more than those who'd been allowed to eat chocolate the whole time.

Cook: What can you tell us about giving gifts to others?

Norton: We often think about giving gifts to others as increasing the happiness of the recipient. Again, think of kids opening their gifts on Christmas morning. Our research, however, shows that gift giving offers benefits to an unexpected group: the givers themselves. In experiments we've conducted in countries ranging from the United States to South Africa, from Canada to Uganda, we consistently find that spending money on other people - whether buying gifts for friends or donating to charity - provides people with much more happiness than spending that money on themselves.

The next time you're in line at Starbucks, think about buying someone else a coffee instead of snagging one for yourself. Or, if you can't bear to go coffee-less, at least consider buying a gift coffee for a friend in addition to the one you'll gulp down.

Cook: Are there any lessons you've applied from this research to your own life?

Norton: Behavioral scientists have studied how people fail to consider what are called 'opportunity costs.' Simply put, anything we buy means we are giving up something else. But we don't often think of our spending this way. When we are deciding between a stereo that costs $1,000 and one that costs $1,100, we focus almost exclusively on which stereo we like better. We don't naturally frame the decision as a choice between the $1,100 stereo or the $1,000 stereo plus $100 worth of new music. Put this way, the $1,000 stereo seems amazingly attractive.

It's a bit the same with money and happiness. We get stuck in thinking that we need to have a house, a car, a flat-screen television to be happy, and so we spend nearly all of our money on these possessions. I try to ask myself before I make any purchase: What else could I be doing with this money? Am I really using this in the best way to maximize my happiness? If not, and this happens with alarming frequency, I put my wallet away.

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