In this nifty short book Elizabeth Dunn and Michael Norton use the latest research to show how to best think about money. Their advice offers many surprises.
Elizabeth Dunn is an associate professor of psychology and Michael Norton an associate professor of marketing. Together they've produced a book whose subject could best be described as behavioural economics. This is a branch of economics that examines the emotional and psychological aspects of how we make financial decisions. Classical economics teaches us that we always make rational decisions when spending money, whereas behavioural economics highlights how irrational our spending can be. We spend money on things that we regret and which later make us unhappy. National economies can also behave irrationally: think of bubbles in housing prices that lead to widespread economic damage.
Happy Money sets itself a rather modest and useful goal. How can we improve our happiness when we spend our money? The answers, it turns out, are rather paradoxical and not entirely what you’d expect. For example, research shows that buying a bigger, better house doesn’t increase your happiness, yet this is where most people spend their money. The next item we spend most of our money on is a car, which also fails to make us happy. In fact, driving a car can add to our stress levels. It appears living in cheap accommodation close to work provides a quicker ticket to happiness than living far from work in an expensive house. Another paradox: people who have more money report higher stress levels. The rich worry very much about managing their money.
To simplify matters, the authors set out five basic principles of happy spending:
- Buy Experiences. Memorable experiences, such as going out to dinner or the theatre, are shown to leave us with a happier glow. The social aspect of these experiences also add to our wellbeing.
- Make It a Treat. This chapter basically preaches that a bit of scarcity can greatly add value to something. Conversely, you could say that it’s possible to have too much of a good thing. By reducing and spacing out consumption, we can improve our enjoyment of it. For example, if you enjoy chocolate, maybe have it once a week at a special time, as something you can look forward to.
- Buy Time. This is the most unusual chapter in the book, as it doesn’t directly relate to spending. It’s more about our attitude to how we spend time. Apparently rich people see their time as more economically valuable, and this causes angst and anxiety about how they spend their time. This chapter almost preaches mindfulness, enjoying the moment and not thinking about money. Research shows that just thinking about money makes us unhappier. Tip: Don’t think about money!
- Pay Now, Consume Later. Pretty much the total opposite of our credit card model. If we pay for things upfront, they seem almost like free treats dropped from the heavens when we receive them at a later date.
- Invest in Others. Being charitable also gives us a happiness boost. Even just giving away a small amount, like $5, can make us feel better. Again, this all sounds counter-intuitive to the received economic wisdom, where selfish decisions are seen as rational decisions. Yet all the research shows that giving away money to charities, friends and worthy causes clearly makes us happier.
Happy Money dispenses its advice and insights in a pretty chirpy and fun way. It’s light economic reading, but backed up with lots of fascinating research. It made me think in new ways about money and how to best spend it. This is the sort of book I’d put into the hands of a young person just entering the workforce, or someone experiencing some sort of financial stress. It may help them to re-prioritise. The ironic lesson of the book is that, by and large, there’s more to life than chasing money.
Happy Money: The Science of Happier Spending, by Elizabeth Dunn and Michael Norton. Published by Bloomsbury. ISBN: 9781780743370 RRP: $19.99
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