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

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.

But a cheap car lasts years. An expensive vacation lasts two weeks. How could the vacation give us more happiness over time?

We favor objects because we think that experiences can be fun but leave us with nothing to show for them. But that turns out to be a good thing. Experiences have the nice property of going away. Cars need repairs, they rust in our driveway, and they ultimately disappoint us enough that we sell them and get new ones. Experiences are like good relatives that stay for a while and then leave. Objects are like relatives who move in and stay past their welcome.

Another reason why experiences beat objects is that experiences are usually social. If you go to Europe you will almost surely go with someone, whereas if you buy the car, you will probably drive it by yourself. We are social animals, and the best predictor of happiness is the goodness and extent of our social relationships. Experiences are more likely to be shared than objects are.

You write, "unfettered access to peak experiences may actually be counterproductive." Explain that.

Imagine making love to the person of your dreams. That will be a good day. But the day after will not. The good thing about peak experiences is that they make us happy while we are having them, but the bad thing is that they then serve as a standard of comparison for all the experiences that follow. When researchers looked at lottery winners, they weren't happier than a control group, but they did take less pleasure in everyday events. The big happiness rush you get when you receive the big check is gone pretty soon, and then when good things happen you find yourself saying, "That was nice but it wasn't like the day I won the lottery."

That doesn't mean you should refuse peak experiences. It just means you should ask yourself, "If I have this peak experience, will it make the rest of my life dull and unsatisfying?"

What's the most controversial suggestion in the paper?If one thing surprises most folks, it might be the suggestion to buy many small things rather than fewer big things. If you asked people if they'd prefer an ice cream cone every Monday for the next few weeks or a great meal at a French restaurant, most would probably take the great meal gift certificate. But it turns out that the frequency of positive events is a better predictor of happiness than intensity of those positive events.

Let's say that you had five good experiences and each had an intensity of 10 out of 10. And I had 10 good experiences each with an intensity of 5. Simple math suggests we should be equally happy. But the odds are that I will be happier than you because happiness is affected less by how good your good experience was and more by how many good experiences you had.
Obviously, intensity matters. It is better to win the Nobel Prize than eat ice cream. But intensity doesn't seem to matter as much as frequency.

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