Here's an interesting paper about money and happiness at https://scholar.harvard.edu/files/d...-money-doesnt-make-you-happy.nov-12-20101.pdf , and why people who have discretionary income to spend rarely spend it in a way that increases their happiness. This, the paper asserts, is due to a number of cognitive biases.
The authors conclude that most people don't know how to use their money to be happy, that "Money is an opportunity for happiness, but it is an opportunity that people routinely squander because the things they think will make them happy often don’t." Then they suggest a variety of things to think about:
"The relationship between money and happiness is surprisingly weak, which may stem in part from the way people spend it. Drawing on empirical research, we propose eight principles designed to help consumers get more happiness for their money. Specifically, we suggest that consumers should (1) buy more experiences and fewer material goods; (2) use their money to benefit others rather than themselves; (3) buy many small pleasures rather than fewer large ones; (4) eschew extended warranties and other forms of overpriced insurance; (5) delay consumption; (6) consider how peripheral features of their purchases may affect their day-to-day lives; (7) beware of comparison shopping; and (8) pay close attention to the happiness of others."
These topics are covered in detail in the paper and were interesting to me. One might wonder how extended warrantees and comparison shopping made this list.
The term affective forecasting is used in the paper. It refers to the ability to predict what will make one happy. From the link: "Errors in affective forecasting can be traced to two basic sources. First, people’s mental simulations of future events are almost always imperfect. For example, people don’t anticipate the ease with which they will adapt to positive and negative events, they don’t fully understand the factors that speed or slow that adaptation, and they are insufficiently sensitive to the fact that mental simulations lack important details. Second, context exerts strong effects on affective forecasts and on affective experiences, but people often fail to realize that these two contexts are not the same; that is, the context in which they are making their forecasts is not the context in which they will be having their experience. These two sources of error cause people to mispredict what will make them happy, how happy it will make them, and how long that happiness will last."
These are some of the relevant cognitive biases the author claims are in play:
The authors conclude that most people don't know how to use their money to be happy, that "Money is an opportunity for happiness, but it is an opportunity that people routinely squander because the things they think will make them happy often don’t." Then they suggest a variety of things to think about:
"The relationship between money and happiness is surprisingly weak, which may stem in part from the way people spend it. Drawing on empirical research, we propose eight principles designed to help consumers get more happiness for their money. Specifically, we suggest that consumers should (1) buy more experiences and fewer material goods; (2) use their money to benefit others rather than themselves; (3) buy many small pleasures rather than fewer large ones; (4) eschew extended warranties and other forms of overpriced insurance; (5) delay consumption; (6) consider how peripheral features of their purchases may affect their day-to-day lives; (7) beware of comparison shopping; and (8) pay close attention to the happiness of others."
These topics are covered in detail in the paper and were interesting to me. One might wonder how extended warrantees and comparison shopping made this list.
The term affective forecasting is used in the paper. It refers to the ability to predict what will make one happy. From the link: "Errors in affective forecasting can be traced to two basic sources. First, people’s mental simulations of future events are almost always imperfect. For example, people don’t anticipate the ease with which they will adapt to positive and negative events, they don’t fully understand the factors that speed or slow that adaptation, and they are insufficiently sensitive to the fact that mental simulations lack important details. Second, context exerts strong effects on affective forecasts and on affective experiences, but people often fail to realize that these two contexts are not the same; that is, the context in which they are making their forecasts is not the context in which they will be having their experience. These two sources of error cause people to mispredict what will make them happy, how happy it will make them, and how long that happiness will last."
These are some of the relevant cognitive biases the author claims are in play:
- Future events seem more desirable for the anticipation, and once it becomes a memory, though a good one, does not provide the happiness that the anticipation did causing a false assessment of how valuable the experience will be and therefore how much of ones resources should be dedicated to it. Maybe you've taken the same vacation to Disneyworld for the past two years, which you enjoyed, but might not have been worth thousands of dollars in retrospect. When the chance comes to go again, will you be swayed by the anticipation or the memory?
- Durability bias is a misjudgment of how long something will make one happy when considering a positive future event. People often expect to feel happy for a longer period than they actually experience when the event occurs. For example, they think that fame will make them happy forever only to discover that it too soon doesn't make them feel as special as it once did. From another article, I read this: "People tend to be inaccurate in forecasting how they might feel later. They also tend to overestimate how positive or negative they would feel about future situations An example might be wishing to purchase a luxury car. You might anticipate immense and extended joy when you finally buy that car, however over time, the joy of owning that car will dissipate." Also, "The joyous occasion of a wedding, for example, might give one the feeling that elation will continue for a long time to come. Yet the honeymoon period might be far shorter than previously anticipated."
- Focalism is "the tendency to place too much focus or emphasis on a single factor or piece of information when making judgments or predictions," perhaps like a young man who defines happiness as getting into the NBA, or a young woman who defines happiness as being a mother, only to discover that while she enjoys it, it was not as fulfilling as she had hoped.
- Another cognitive bias is called time discounting, which is putting a greater emphasis on what matters today than thinking about future needs. This is obviously a problem for those who can save but don't, or who cheat on their spouses without considering the unhappiness that may follow.
- Projection bias, "is the tendency to project one’s current preferences into the future. However, what one wants now may not be the same at a later date. A person’s momentary emotional state has a lot of influence over their future selves."
