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Get happy while spending your money

Money can very well make you happy, says Harvard Professor Michael Norton. Addition: if you spend it correctly. Because spending your own money on objects and yourself has little effect on our satisfaction. On the other hand, experiences and expenses for others do.

Michael Norton answers questions calmly and carefully, smiles every now and then and seems largely at peace with himself. You don't get the feeling at all that the Harvard professor has just been through an odyssey during which he traveled to Munich via Chicago with a significant delay because of a snow storm on the US east coast.

Because Norton gave the keynote speech for the “Think Forward Initiative Summit 2017” of the Dutch financial service provider ING in the Microsoft Technology Center. Over a period of three years, the initiative will work with partners such as Microsoft, Dell and Deloitte to define solutions and ways to help people make more meaningful financial decisions. This means, among other things: a better understanding of financial products, less debt and more money for retirement. In theory, that is a noble proposition. But contrary to the simplified assumptions of economic models, people are anything but rational when it comes to their own money. They are much more likely to spend their income in such a way that relatively little is left and satisfaction is hardly improved. Because it has been proven that big houses and fine cars don't make us happier. However, the adage that money does not make you happy in general is wrong.

At least that's what Michael Norton says. According to him, money can very well make you happier if you spend it right. In his speech, for example, he describes the feeling of happiness we have when we buy a television - and compares it to the feeling of happiness on an extended trip. When buying a television, we stress us beforehand with the effort required to buy it, and then the quality and thus personal happiness decrease over time. The trip, on the other hand, creates anticipation - according to studies, people feel the greatest feeling of happiness the day before the trip - and wonderful memories.

So Norton advises spending money on experiences. The researcher found similar results when comparing expenses that one spends for oneself and expenses for others. Here, too, money that is spent on fellow human beings has significantly better results for our satisfaction. But what is global happiness like in the face of increasing financial inequality? How do you measure happiness? And is the inclusion of happiness in state decisions, as Bhutan tries with its “gross national happiness”, a sensible approach?

It seems like people are getting more and more unhappy. Is that correct? Is happiness so valuable because it is becoming rarer?
We cannot say for sure whether people really get more unhappy over time; partly because it is difficult to compare happiness across generations. We don't know too much about the determinants of happiness either. I do think, however, that the relationship between money and happiness is an important one. We focus on things that people can change in order to be happier. We want to help people become happier with their money - but also in general. Because even if people are not unhappy, we want to make them happier.

How can that be done?
We have discovered that the basic idea that money cannot make you happy is neither right nor wrong. We have observed in our research that the way we spend our money does not actually “buy” happiness. This category includes expenses for ourselves, i.e. a house or a car, but also little things that we buy for ourselves. That doesn't increase our sense of happiness. And yet we spend the majority of our money on such things. So we looked at the impact of two expenses: instead of buying things, spending our money on experiences. And instead of spending money on ourselves, buying something for others. Both increase our sense of happiness significantly. When it comes to experiences, on the one hand we have the anticipation and on the other hand we have the nice memories that accompany a trip, for example, and have a continuous effect on happiness. Second, spending on other people is better for our sense of happiness. We have not yet examined all countries, but those where we have done research have confirmed this thesis. Whether the US or Uganda, the results are clear.

We have discovered that the basic idea that money cannot make you happy is neither right nor wrong

How do you deal with problems measuring happiness - such as subjective bias?
Measuring happiness is an interesting thing. When asked where they would be on a scale from one to ten, most people would say "seven" after a short pause. And that's pretty rash, because normally you'd have to spend a week thinking about how happy you are. So if I ask you today, you are probably saying “seven”, even in a month, even in a year. But when people lose their jobs they might say “six” and if they get married they might say “eight”. So I don't know what this information means for another person. And I don't know if my “seven” means the same as yours. But we see deviations due to changes in people's lives. So we try new things and see whether they increase or decrease the feeling of happiness. If something gets us up, we should do more of it. Conversely, we should do an action less often if it brings us down the scale. I often compare this to blood pressure measurements: 120/80 is a good value, but nobody knows what that actually means. But if we deviate significantly from this value, we know that we have to do something about it.

In addition to the way in which we organize our expenses, there are many other influences on our happiness: relationships, hobbies, etc. What proportion of fluctuations in personal happiness do our expenses actually have?
We started with the financial situation because it is easy to convey to people. Say, "Instead of spending that ten US dollars on this thing, spend the money on this thing." This behavior change is easy to achieve. How people shape their time is much more difficult to influence. So when I say, "Donating makes you happy, donate US $ 100 to a charity," a lot of people do. But if I say: "Donating makes you happy, help out for an hour in a charitable organization as a volunteer", significantly fewer people will do that. Because suddenly it's about your time and no longer about your money.

Does having control and knowledge of one's finances help people become happier?
A broad approach, which is also used in the Think Forward Initiative, is good. And broadly spread over people's financial decisions. In our research, however, we do not necessarily focus on the different types of financial decisions, but on the "hedonic payoff" ("emotional payoff", note). For example, we realized that saving doesn't have a big emotional impact, because it's simply boring. Money just moves from the pay slip to a savings account without our really realizing it. It just disappears - and the hidden can't really be exciting. So we thought about how we could make things like that more attractive. One of my students designed an example: You can pay off parts of your credit card bill by clicking on them online, which causes them to "explode" on the screen. The result was that customers paid off their debts faster. That said, we can help people manage their debt by making the process more exciting. We don't have the answers to all questions yet. The goal is to find ways that will increase personal happiness so that people will use these solutions more often.

A study by Princeton University found that people with an annual income of around $ 75,000 or more do not experience any additional happiness from higher salaries. Is that correct?
It seems that this number is different in different countries, but $ 75,000 isn't a bad benchmark. Of course, it also depends on the cost of living. Up to this point, more income correlates with more happiness, after which the effect becomes smaller. The story that has been told so far, however, is that the increase in happiness afterwards tends to zero - that is not true. The increase is only smaller from this threshold. But we have new data from millionaires and they are happier than the average population. So the increase continues. Of course, if a super-rich person makes an extra million dollars, the effect is less than that of the average person.

Financial inequality in society is increasing. How does this phenomenon affect the feeling of happiness within a country or in the world?
Our data shows mixed results. There is a strong correlation when people earn the most in their immediate vicinity. With the same income, we are happier when we earn more than our neighbors than when others earn more. So social comparisons have an impact. When we look at inequality on a broader scale, the popular belief has long been that inequality makes us unhappy. That still seems to be the case. But there has been some recent research that suggests the relationship isn't quite as straightforward as we thought.

There are approaches to include the generation of happiness in public decisions. Bhutan with its “Gross National Happiness” is a prime example. Correct Approach?
There are already some cities in the USA that use luck as an indicator. I think it is important to note that no one would ever claim that happiness should be the only basis for making decisions - or even that it is the most important. But luck should be included in decisions. The assessment of personal happiness on a scale from one to ten says a lot about a person's situation. We know whether he has financial difficulties, whether he is unemployed, etc. Nobody should stop being interested in gross domestic product just because gross national happiness also plays a role. We want people to be financially secure and happy.

How can financial institutions that in the past have not always focused on their customers' happiness make their customers happier?
Let's look at companies that sell products and services to customers - even outside the financial industry. They try to design products and experiences that people love. Apple is the prime example: The company wants us to be excited when we use an iPhone and never put it down. The financial industry has tended to not focus on this approach. Because banking is typically boring and stressful. But if we really want people to change their behavior and make better financial decisions, talking doesn't help. It's kind of like telling people to exercise every day. You know that, but you still don't. But if there are solutions that make these decisions exciting, it is more likely that people will make them too.

What advice would you give people on how to become a little happier with little effort?
A simple solution is as follows: Before making a purchase - whether online or in real life - we should pause for half a second. And wonder if this purchase will make us happier. Sometimes the answer is "yes" and then we should make the purchase. Often the answer will also be “no”. An example is coffee: I like coffee and like to drink it. The question, however, is whether the seventh coffee of the day will really make me that much happier. Probably not. And while that's an extreme example, we can apply it to any purchase. I am trying to do that. And even if we don't get happier, we can still make the purchase - no problem. But this half second could still lead to a better allocation of our money.


Klaus Fiala,