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(Andrei Tselichtchev/Getty Images/iStockphoto)
(Andrei Tselichtchev/Getty Images/iStockphoto)

Money might buy you happiness, if you spend it right Add to ...

Last spring, world leaders gathered at the United Nations to discuss a pressing international matter: the happiness of the world.

The UN Conference on Happiness marked the first time the international community sat down to discuss something as seemingly squishy and subjective as how to make the world a cheerier place – following efforts by France and Britain, among others, to create new metrics to rate a nation’s success not according to gross domestic product but by citizens’ subjective well-being.

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“Happiness studies” has been a trendy field for more than a decade, both in academe and on the bestseller lists. But since the fiscal collapse of 2008, it seems the focus has shifted from the social psychology of satisfaction to the harder facts of dollars and sensibility.

In 2013, as we continue to debate politically whether dour austerity or upbeat stimulus is the better economic remedy, number-crunchers are trying to answer the question posed by a thousand novels and at least one Baz Luhrmann 3-D spectacle: Can money buy happiness?

New academic journals have been devoted to happiness economics and a raft of books and studies are published each year. The most recent study, published by prominent economists Betsey Stevenson and Justin Wolfers a few weeks ago, made headlines: It claimed to overturn decades of research by finding that money does indeed produce happiness, and at every income level.

Meanwhile, a new book by Canadian academic Elizabeth Dunn and Harvard Business School marketing professor Michael Norton suggests that researchers may have been asking the wrong question: Perhaps it is not how much money people have that makes us happy, but how we choose to spend it.

Like the current one, the original boom in happiness-economics research came at a time when a long period of prosperity was sliding into a slump, in the 1970s. Before that, “happiness used to be a province of psychology,” says Trent University professor Mak Arvin, who launched the International Journal of Happiness and Development in 2012.

The foundational work came from American economist Richard Easterlin, who observed that the great postwar growth in wealth in the United States and Japan had not made the countries correspondingly happier.

He and other researchers theorized that this was due to what they called the “hedonic treadmill” – that is, we get used to nice things, and then they stop making us happy. A big promotion may boost your spirits next week, but by next November, it will simply be the daily grind.

Perhaps our relative wealth – how much money we have compared with the Joneses – is more important than our absolute wealth.

Since then, this “Easterlin Paradox” has been refined to suggest that once you reach a certain threshold – around $75,000, according to recent studies – increased wealth does not increase happiness. A new BMW won’t make your heart sing if you already have a half-dozen Ferraris in the garage.

The popularity of that model might have been due not only to the data, but to the way it chimed with the anti-materialistic ethos of the time, as an indictment of mindless consumerism. Indeed, it still has an innate appeal, especially to anyone who is not as rich as we’d like to be.

Over the years, however, numerous economists have challenged the theory. Most recently, Profs. Stevenson and Wolfers have come forward to state boldly that the Easterlin Paradox simply does not exist.

Building on research begun in 2008, they looked at multiple data sets, analyzing Gallup polls, the World Values survey, the Pew Global Attitudes survey and other sources that asked people to rate their life satisfaction.

Charted against income, the results were clear: Rich people in every country were happier than the poor. Rich countries were happier than poor countries.

In the United States, for example, just 35 per cent of respondents earning less than $10,000 a year said they were “very satisfied” with their life, compared with 60 per cent of those earning $100,000 to $150,000. (For the record, all eight of the respondents earning more than half a million dollars said they were happy.)

Moreover, they found that there is no sign that the pleasure gained from another dollar earned ever disappears entirely. Although it will create a lot more happiness for a poor family, a $10,000 lottery win will increase the happiness of even the wealthiest person.

The Easterlin Paradox, they argue, is simply the result of insufficient data. When it comes to cross-country comparisons, for example, Prof. Easterlin was able to look at only 16 different nations, too few to find any statistically significant differences in happiness.

“Studies by us and others have pointed to a robust positive relationship between well-being and income across countries and over time,” Profs. Stevenson and Wolfers write. “If there is a satiation point, we have yet to reach it.”

In many ways, these new findings are more in keeping with common sense. As the bawdy vaudeville singer (and amateur happiness economist) Sophie Tucker once said: “I’ve been rich and I’ve been poor. Believe me, honey, rich is better.”

One of the difficulties, however, is deciding exactly what we mean when we talk about being “happy.” There are different kinds of happinesses, different flavours. Two distinct categories that are often conflated are emotional well-being – the amount your smile, laugh or enjoy yourself on any given day – and an overall evaluation of your life.

When researchers ask people about this second category, they often tell respondents to imagine their life on a ladder: If zero is the worst possible life and 10 is the best, where do you see yourself?

Profs. Stevenson and Wolfers are measuring life satisfaction, which does seem to continue to grow with income. The pair acknowledged that other studies have shown that your day-to-day enjoyment does not increase beyond a certain dollar figure.

The most famous is a 2010 study by Nobel Prize winner Daniel Kahneman and Angus Deaton, past president of the American Economic Association, which found that after $75,000, increased riches did not give people any more emotional enjoyment.

So perhaps the answer is, yes, enormous riches can give you a sense of satisfaction, but the lottery-commercial dream of a sun-drenched life free from worry and stress is an illusion.

“Money seems pretty good at making us feel satisfied with our lives, but it doesn’t seem to have as much of an impact on day-to-day good feelings,” says Elizabeth Dunn, a professor of psychology at the University of British Columbia and the co-author of the recent book Happy Money .

Prof. Dunn did her graduate work in happiness studies. When she finally got a job as a professor, she found herself with a sudden windfall – a normal, grown-up salary. The young professor decided to work with her friend Michael Norton at Harvard Business School to try to figure out how to get the most happiness bang for her buck.

In their book Happy Money, which came out this week, Profs. Dunn and Norton look at both the economic and psychological research to find the answer. “We’re always told that money doesn’t buy happiness,” Prof. Dunn says. “But just because it often fails to buy happiness, doesn’t mean it can’t.”

Most of us are surprisingly bad at figuring out how to spend our money to make ourselves happiest. “We do so many things in a day that it’s impossible to figure out how much each individual activity is affecting our happiness,” she says.

In building a baseball team or managing stocks, going with your gut is worse than going with the statistical analysis. The same, they say, is true of maximizing your joy-to-dollar ratio. For example, although owning a house is often seen as an important step toward adult contentment, there is next to no evidence that it actually makes us happier.

Researchers tracked thousands of people in Germany who moved from one home into nicer one. Five years later, they found that the homeowners remained more satisfied with their new houses, but did not report more satisfaction with their lives. It had not made them any happier.

In contrast, people who spent money on experiences – whether trips or fancy dinners or a night of dancing – reported feeling happy when thinking about their purchases.

The Happy Money research also shows that we often radically undervalue our time, for instance by wasting hours on a miserable layover in Atlanta rather than spending the extra $150 to get a direct flight.

Perhaps most counterintuitively, they found that giving money away is more likely to make you happy than spending it on yourself. When random passersby were given a $5 bill and were instructed to either spend it on themselves or to spend it on someone else, those who gave it away reported feeling significantly happier that evening.

Spending on others makes you feel good, generous and wealthy.

In Happy Money, authors Elizabeth Dunn and Michael Norton analyze what spending choices maximize happiness. Here are some of their suggestions.

Five ways to buy joy

 

1. Buy experiences

 

Studies have shown that paying for trips or special meals creates more happiness than buying objects. Even spending a few dollars to play a video game or hear a song provides more lasting happiness than buying a few trinkets.

 

2. Make it a treat

Humans adapt to everything, including things that make us happy. Research shows that we vastly underestimate just how quickly our pleasure will fade. Instead of cutting out ice cream completely, by limiting it to special occasions we can “re-virginize” ourselves, renewing our capacity for pleasure.

 

3. Buy time

While wealth theoretically allows us to outsource some of our most hated tasks, most people tend to overvalue money and undervalue time. Before you make a purchase, think: “How will this change the way I use my time?”

 

4. Pay now, consume later

Paying up front and delaying your consumption is one way to increase your happiness on any given purchase. Vacations make us most happy because of the anticipation. Studies have shown that even waiting briefly before eating a Hershey’s Kiss makes it taste better.

 

5. Invest in others

Research shows that spending money on others can make you more happy than spending on yourself. This is true for Warren Buffett, who famously decided to give away 99 per cent of his wealth, but studies also show that it’s true for Ugandan women buying life-saving malaria medication for a friend. Earn your money, but to be happiest, it helps to spread it around.

That said, there is no one prescription – the idea of carefully creating a ledger of expenditures based on psychological research, following your budget, and then expecting to be happy at the end is misguided. Indeed, there have been numerous studies that show that perhaps the least helpful thing you can to do is consciously focus on your happiness.

While academics might argue about the precise nature of the relationship between money and happiness, they would all agree that we tend to overvalue it. A national survey revealed that Americans thought that their life satisfaction would double if they made $55,000 rather than $25,000. In fact, such an income leap only produces 9 per cent more happiness.

You can read the studies or watch a blockbuster F. Scott Fitzgerald adaptation to get the same message: Money matters, of course. But it never matters quite as much as we think it will.

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