What Is the Secret to Happiness and Money?

Follow these principles: 1) Buy more experiences and fewer objects. 2) Don't worry about insurance. 3) The frequency of happy events matters more than their intensity.

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It's called the "dismal science," but economics delivers a cheerful reply to the saying Money can't buy happiness. In the early 1970s, economist Richard Easterlin discovered rich countries were indeed much happier than poor countries. After a certain point, however, greater GDP stopped producing greater happiness. In 2008, Betsey Stevenson and Justin Wolfers refined his thesis to show that well-being continues to increase with more money, but at a rate proportionate to your income.

In short, economists agree that money does buy happiness. But the more you have, the less it buys.
The Money ReportA new exciting paper in the forthcoming Journal of Consumer Psychology makes the case that money should buy us happiness, but most people aren't spending it right. On the edge of psychology and economics, Profs. Daniel Gilbert, Elizabeth Dunn and Timothy Wilson lay out eight principles of spending efficiently, including:

1) Buy more experiences and fewer material objects
2) Buy many small things rather than a few large things
3) Avoid extended warranties and outsized insurance plans

I spoke with Gilbert, Harvard professor and author of the international bestseller Stumbling on Happiness, about what we should do with our money to more efficiently buy things that make us happy. This transcript has been edited for clarity by me and refined in subsequent emails with Gilbert.

The conventional wisdom seems to have evolved from "Money Can't Buy Happiness," to "Money Can Buy Happiness Up to About $60,000, Then It Cannot" to your new piece arguing "Money Can Buy Happiness If You Know What to Buy." Would you say that accurately describes the evolution of happiness economics over the last few decades?

I don't know of any economist who has ever said money can't buy happiness. It's clear that people don't ever become sadder when they make more money. But there is an inflection point where the line starts to bend and flatten, and that is somewhere between $40,000 and $110,000 a year

The most controversial bit of advice: Buy many small things rather than fewer big things.

Your book Stumbling on Happiness explained that we adapt to very negative and very positive experiences much faster than we would have expected. What does this mean for money and happiness?

If you can adapt surprisingly well to negative events, then you probably need less insurance than you're buying. If I think how bad it will be if my refrigerator breaks, and I figure out how much money I'll need for insurance, I'll probably pay too much to protect myself.

To be clear, you're not saying "Don't worry about insurance." You're saying "People probably spend too much on insurance."

I have insurance. It's prudent. But we tend to overestimate how bad a future loss will be, and so we pay too much to insure against it. For example, Derek, how much would you have to be compensated for the loss of your finger? As you're typing, you might think: "Millions! I'm willing to give up a big part of my paycheck!" But if you examined people who'd actually lost a finger, you'd probably find that they're doing just fine. It's an inconvenience, but not a horror, and you shouldn't give up half your paycheck to be compensated for that loss.

The first lesson in your paper is to buy more experiences and fewer material goods. It's persuasively argued. But some objects give us experiences, like a car, or an indoor gym. How should we weigh those against pure experiences like a vacation?

There is a continuum from a massage, which is purely experiential, to a diamond you keep in a safe deposit box, which is purely material. Most things are in the middle.

Sometimes you have to make a choice: Do I get a new car or take a European vacation? It's pretty easy to say which of these is more experiential and which is more material. The research suggests that all else being equal, you'll be happier with the vacation.

Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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