happiness economics

“Building wealth is important for your happiness, but focusing on it is not.”   So spoke Dr. Robert Biswas-Diener, the “Indiana Jones of positive psychology” at a recent financial conference.   A survey using a Life Satisfaction scale showed that people who value love more than money are way happier than people who value money more than love.  The latter are, in fact, miserable.

Much of his research has been in desperately poor areas of the world – the slums of Calcutta, for example.  Calcuttians say Americans cannot be happy because we have too much money, which gives us too much choice and distractions.   People he interviewed in India are, unlike a lot of Americans, happy with themselves and happy with their communities.  More specifically, they are happy with their morals and their looks.  They are not as happy, however, with their health, their income, and their resources.   All of these factors enter into the Life Satisfaction happiness scale.

In linking his research to the financial world, when we ask ourselves, “How much do I need to retire?”  “What’s my ‘number?'”  or “What’s the best mutual fund for the 21st century?”  the answer, therefore, is  “It depends.”  It depends on what retirement means.  It depends on what the number is for.  It depends on whether it’s important to always be searching for more, or to simply have enough.  It depends on whether we are willing to suspend our societal belief that money buys cures for unhappiness.

The reverse is more likely.  Happiness can buy us money.  First, in general, happy people are shown to be healthier.  (Biochemically, happy people produce more fibrinogen which avoids blood clots and boosts the immune system.)  Healthier people have lower medical bills = more money.    Second, happy people are shown to get more promotions and pay raises.  People in general are more likely to advocate for happy people.  Network of advocates = more money.  Third,  happy people expect that things can get better.  These expectations may be optimistic, but are also often realistic. Because these positive expectations are achievable, things often do get better, thus reinforcing the expectation. Setbacks are viewed as only temporary, rather than permanent failures.  Living with the expectation that things can get better, as distinct from wallowing in discontent, means a greater sense of current satisfaction and wellbeing.  Wait a minute, isn’t this the mental state we have been expecting money to buy for us all along?  Perpetual state of satisfaction and wellbeing = priceless.  Happiness can buy money, because if you are happy, the money you have goes a lot further.

How do we get to be one of these happy people if we are not one already?   We must first understand that happiness is not a destination. It is a process. There are three practices that can contribute to it.

1)  Quit making inaccurate predictions of how much happiness we will gain from X or Y.  The reason is, the disappointment of something not meeting our happiness prediction hurts far more than the glee of unexpected pleasure feels good.  If we enter into more transactions, whether relationship, consumption, or financial, without being in future-happiness-prediction-mode, and accept and enjoy only what is in the present, we are far less likely to experience disappointment and regret.

2) Discretionary income should be spent on experiences not on possessions.  Experiences would mean things like moving across town, entering a marriage, or traveling.  We tend to adapt to material stuff, forgetting that it is there, but not experiences.   Experiences allow us to savor the past because we drag “magical moments” into the present.  We don’t remember shoes from ten years ago but we remember our first skydive or a foreign trip.    However, even with experiences, we mispredict how happy we will be from a certain expenditure.  A trip to the Grand Canyon could bring just as much remembered happiness as a cruise around the world.  Eight days in Hawaii could bring the same remembered happiness as fourteen days.

3)  Spending money on others brings happiness dividends.  Experiences also include things that connect with others.  Happy people consistently report being charitable.  Does being happy cause them to be charitable, or does being charitable cause them to be happy?  Either way, if you want to increase the correlation between lasting happiness and money, ironically, you should connect with others by giving some of it away.

For many of us, by practicing a few more happiness principles, we can begin to build wealth by, paradoxically, not thinking about it so much.