8 principles that will make you smarter about money

It's not the act of buying but how you spend money that improves happiness and life satisfaction.

8 principles that will make you smarter about money
  • To prove money can't buy happiness, people point to millionaires and lottery winners who ruined their lives.
  • Psychological studies have shown that learning how to spend your money can improve overall happiness.
  • We explore eight money-spending principles that research suggests can bolster life satisfaction.


Gerald Muswagon won $10 million playing the lottery. He bought cars and a party pad. He threw lavish parties, showered his friends with gifts, and invested in a logging business. But the business flopped, the drugs and alcohol took their toll, and his reckless behavior grew more intense. He hung himself in 2005.

Then there's Suzanne Mullins. She won $4.2 million dollars, but lost it all after covering a slew of medical bills for uninsured family members and losing a settlement over a loan default. Or Lara and Roger Griffith, who used their winnings to buy a dream home, a Porsche, and luxurious trips. They lost their home in a fire, their money covering the underinsured asset, and their marriage to alleged infidelity.

Stories of lottery winnings bringing people to ruination are numerous. It even has a name, the "Lottery Curse." The response to such stories is equally ubiquitous. In order: there's the "tsk, tsk" of teeth, the solemn head shake, and the dusting off one of mom's favorite aphorism, "Well, money can't buy happiness."

While lottery winners are an extreme case, research has revealed the aphorism is true. Partly. Psychologists often added an addendum your mother forgot to quote. Money can't buy happiness — if you don't know how to spend it.

Why doesn't more money guarantee more happiness?

"Because people don't spend it right. Most people don't know the basic scientific facts about happiness — about what brings it and what sustains it — and so they don't know how to use their money to acquire it."

That quote is from a research paper published in the Journal of Consumer Psychology, written by Elizabeth Dunn (University of British Columbia), Daniel Gilbert (Harvard University), and Timothy Wilson (University of Virginia). These three psychologists reviewed the literature on affective forecasting, the ability to predict how you will feel in the future, to discover why people habitually mis-predict sources of happiness.

It seems our ignorance stems from two scuffs in our cognitive crystal balls. First, we inaccurately anticipate how quickly we adapt to new experiences, both positive and negative. Second, we don't consider context, often failing to recognize that the context in which we make a financial decision will not be the same as the one that decision affects.

"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," the study authors write.

They analogize this to collecting wine. No amount of wealth can help you stock a superior cellar if you are ignorant of wine. Similarly, wealthy people can have all the happiness advantages yet never capitalize on them if they know nothing about what brings happiness. (Recall our lucky yet ill-fated lottery winners.)

To help us stockpile life satisfaction, the authors offer eight principles for how to spend money wisely.

1) Buy more experiences, fewer material goods

We adapt to material goods quickly. Consider the Blu-ray you had to have but then watched once. Last year's fall fashion that hangs in the closet. Or those cabinet doors that were part of your dream kitchen but barely register as background now.

Experiences, on the other hand, stay with you. Our experiences become a central part of our identities, and we reminisce more on them than our material purchases. As a result, we develop a stronger emotional connection to experiences, one that remains intense long after the experience has passed.

Michael Norton, an associate professor of marketing at Harvard who co-wrote a book on the subject with Dunn, told us in an interview that experiences come with an additional benefit:

[W]hen we buy stuff for ourselves, we end up by ourselves with our stuff. Think of yourself on your phone playing a video game or whatever else it might be, you're often alone with your stuff. Whereas experiences, yes, we do some experiences solo, but many, many experiences have built into them that they're social.

2) Use money to benefit others

Because of our social nature, another principle is to benefit others with our money. Studies performed by Dunn and others have shown that participants who spend money pro-socially disclose a higher level of satisfaction. While personal spending did not diminish participants' happiness, it did not increase it either. The results were flat.

"It seems that on average when people give to others — which can be giving to charity, it can be treating a friend to lunch, it can be buying people gifts — that those actions of giving rather than keeping seem to be associated with more happiness," Norton said.

3) It's the small things that count

Smaller purchases like grabbing a coffee stave off our experiential adaptation thanks to inherent novelty.

(Photo: WarnerMedia)

As we mentioned, people adapt to gains and losses quickly. We loved that rug because it tied the room together, but eventually it became another rug. We were devastated when a loan shark soiled it, but we abide.

One way to impede adaption to positive sensations is to purchase smaller, more frequent pleasures in lieu of grand, expensive ones. The authors cite several reasons for this. Smaller events and purchases tend to have more novelty (think bar-side trivia night) and so stave off adjustment. And the diminishing marginal utility principle tells us that for each additional gain we receive less subjective value. By breaking up our gains, we increase the pleasure we derive from them.

"Thus, by treating themselves to frequent, fleeting pleasures (rather than more sporadic but prolonged experiences), consumers can capitalize on the burst of delight that accompanies the first minute of massage, the first bite of chocolate cake, and the first sight of the sea," the study authors write.

4) Avoid overpriced protection you don't need

We want to protect ourselves from the pain of loss, and this risk aversion makes us marks to statistically bad bets. Think of extended warranties. In theory, extended warranties protect you should your expensive purchase break. In practice, they are often just a way to spend more money on the same product.

A Consumer Report survey from 2013 found that car owners paid more in extended warranties than they reaped in direct benefits. The organization found a similar disparity with electronic warranties. While the electronics report mentions some exceptions—such as smartphones, which are expensive, breakable, and travel everywhere—it notes that manufacturer's warranties will cover much the same and repair costs are often comparable to the extended warranties.

5) Delay gratification

Sometimes anticipation proves more enjoyable than the experience itself.

(Photo: MGM)

Delayed gratification improves life satisfaction in several ways. The most obvious is that we make better decisions when we don't act immediately. We curb our interest-infested debt when we pass up a pleasure today for greater rewards tomorrow. And we stay healthier by not purchasing fast food during a frenzied lunch, but prepare a meal the night before.

Less obvious is the role anticipation plays in pleasure. As the study authors put it, anticipation is basically "free happiness." The items you purchase or receive provide a measurement of happiness, but add in some anticipation and you get to enjoy the item and the anticipation. It's a net benefit.

The authors note studies that suggest people can enjoy anticipation of an event, such as a trip or concert, even if the event itself is lackluster. A potential reason for this is that anticipation is "unsullied by reality." It's why younger you enjoyed the anticipation of a holiday gift more than the socks you unwrap.

6) Consider how purchases may affect daily life

When making big purchases, it's best to consider how they will affect your daily life, not their far-flung future potential.

(Photo: Universal Pictures)

Another blemish in our cognitive crystal balls is our tendency to view the future abstractly. The further the future under consideration, the more abstract our estimate. Because of this, the study authors recommend always considering how purchases will affect your daily life.

They give the example of a homebuyer choosing between a small yet maintained cottage or a large fixer-upper for the same price. Looking far into the future, the homebuyer can imagine their life after the repairs have been completed. This makes the large home seem the better deal

But if the homebuyer thinks about weekends lost to projects, evening trips to Home Depot, and the time spent in consultations with contractors, they may decide the distribution to their day-to-day life will ultimately diminish their life satisfaction.

"On any given day, affective experience is shaped largely by local features of one's current situation—such as experiencing time pressure at work or having a leisurely dinner with friends," the authors write. "Over time, psychological distress is predicted better by the hassles and 'uplifts' of daily life than by more major life events.

"This suggests that consumers who expect a single purchase to have a lasting impact on their happiness might make more realistic predictions if they simply thought about a typical day in their life."

7) Beware comparison shopping

Comparison shopping appears a healthy habit. You shop around, compare features and attributes, and rationally choose the best option for your price range. What could make you happier? That situation makes sense so long as humans are truly rational actors. But we aren't (see entries 1–6 on this list).

Comparison shopping sabotages our happiness by subtly shifting our attention. When we engage, we don't look for the features and attributes that would make us happy; instead, we focus on the differences of the available options. As a result, we buy more than we need or select for the best deal — not the item that we want or that better fits our circumstances.

Additionally, the more choices we have to compare, the less happy we are with our choice. As psychologist Barry Schwartz, author of the Paradox of Choice, explains in his TED Talk:

All of this choice has two effects, two negative effects on people. One effect, paradoxically, is that it produces paralysis rather than liberation. With so many options to choose from, people find it very difficult to choose at all. [Second,] when there are lots of alternatives to consider, it's easy to imagine the attractive features of alternatives that you reject that make you less satisfied with the alternative you've chosen.

Ever waste an evening scrolling through your Netflix list to ultimately watch nothing? Then you've experienced Schwartz's paradox.

8) Follow the crowd (occasionally)

Sometimes it pays to follow the crowd.

(Photo: WarnerMedia)

The authors' final principle is that the best way to predict your enjoyment is other people's experiences. Particular movie genres, for example, tend to be popular among certain demographics. Young people share a love for comedies and horror, while the 65+ crowd prefers dramas and thrillers. But you don't have to follow your demographic's normative tastes. Men who adore romantic comedies can still gauge their enjoyment by weighing a movie's reception among other rom-com aficionados.

We can also make better decisions by listening to what others can tell us about our own desires. The authors cite a study in which participants are served two snacks. They were asked to predict their enjoyment before eating and rate their enjoyment after partaking.

Observers watched the participants' facial reactions when presented the snacks and guessed at how they would enjoy of the food. The observers made more accurate forecasts of the participants' enjoyment than the participants themselves.

"This suggests that an attentive dining companion may be able to tell whether we would enjoy the fish or the chicken simply by watching our reactions when these options are presented. More broadly, other people may provide a useful source of information about the products that will bring us joy because they can see the nonverbal reactions that may escape our own notice," the authors write.

The root of some happiness

The reason devastation of lottery winners makes the news is because these events are rare — and, let's be honest, a dash of schadenfreude. In truth, research suggests the Lottery Curse is an invention of the availability heuristic. Most winners don't burn through their earnings or even quit their jobs. They simply spend their money more wisely.

"It seems like a simple relationship, which is: we want more money and we want more happiness, so maybe if we get more money, we'll get more happiness. And it turns out that the relationship is really a lot more complicated than that," Norton said in our interview.

We may not all have lottery winnings, or even the $95,000 per year research equates with optimal life satisfaction. But if we learn how to spend our money toward the things that truly make us happy, we may all be, at least a little bit, happier.

An artist's depiction of Lola.

Tom Björklund
Surprising Science
  • Researchers recently uncovered a piece of chewed-on birch pitch in an archaeological dig in Denmark.
  • Conducting a genetic analysis of the material left in the birch pitch offered a plethora of insights into the individual who last chewed it.
  • The gum-chewer has been dubbed Lola. She lived 5,700 years ago; and she had dark skin, dark hair, and blue eyes.
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Are we really addicted to technology?

Fear that new technologies are addictive isn't a modern phenomenon.

Credit: Rodion Kutsaev via Unsplash
Technology & Innovation

This article was originally published on our sister site, Freethink, which has partnered with the Build for Tomorrow podcast to go inside new episodes each month. Subscribe here to learn more about the crazy, curious things from history that shaped us, and how we can shape the future.

In many ways, technology has made our lives better. Through smartphones, apps, and social media platforms we can now work more efficiently and connect in ways that would have been unimaginable just decades ago.

But as we've grown to rely on technology for a lot of our professional and personal needs, most of us are asking tough questions about the role technology plays in our own lives. Are we becoming too dependent on technology to the point that it's actually harming us?

In the latest episode of Build for Tomorrow, host and Entrepreneur Editor-in-Chief Jason Feifer takes on the thorny question: is technology addictive?

Popularizing medical language

What makes something addictive rather than just engaging? It's a meaningful distinction because if technology is addictive, the next question could be: are the creators of popular digital technologies, like smartphones and social media apps, intentionally creating things that are addictive? If so, should they be held responsible?

To answer those questions, we've first got to agree on a definition of "addiction." As it turns out, that's not quite as easy as it sounds.

If we don't have a good definition of what we're talking about, then we can't properly help people.

LIAM SATCHELL UNIVERSITY OF WINCHESTER

"Over the past few decades, a lot of effort has gone into destigmatizing conversations about mental health, which of course is a very good thing," Feifer explains. It also means that medical language has entered into our vernacular —we're now more comfortable using clinical words outside of a specific diagnosis.

"We've all got that one friend who says, 'Oh, I'm a little bit OCD' or that friend who says, 'Oh, this is my big PTSD moment,'" Liam Satchell, a lecturer in psychology at the University of Winchester and guest on the podcast, says. He's concerned about how the word "addiction" gets tossed around by people with no background in mental health. An increased concern surrounding "tech addiction" isn't actually being driven by concern among psychiatric professionals, he says.

"These sorts of concerns about things like internet use or social media use haven't come from the psychiatric community as much," Satchell says. "They've come from people who are interested in technology first."

The casual use of medical language can lead to confusion about what is actually a mental health concern. We need a reliable standard for recognizing, discussing, and ultimately treating psychological conditions.

"If we don't have a good definition of what we're talking about, then we can't properly help people," Satchell says. That's why, according to Satchell, the psychiatric definition of addiction being based around experiencing distress or significant family, social, or occupational disruption needs to be included in any definition of addiction we may use.

Too much reading causes... heat rashes?

But as Feifer points out in his podcast, both popularizing medical language and the fear that new technologies are addictive aren't totally modern phenomena.

Take, for instance, the concept of "reading mania."

In the 18th Century, an author named J. G. Heinzmann claimed that people who read too many novels could experience something called "reading mania." This condition, Heinzmann explained, could cause many symptoms, including: "weakening of the eyes, heat rashes, gout, arthritis, hemorrhoids, asthma, apoplexy, pulmonary disease, indigestion, blocking of the bowels, nervous disorder, migraines, epilepsy, hypochondria, and melancholy."

"That is all very specific! But really, even the term 'reading mania' is medical," Feifer says.

"Manic episodes are not a joke, folks. But this didn't stop people a century later from applying the same term to wristwatches."

Indeed, an 1889 piece in the Newcastle Weekly Courant declared: "The watch mania, as it is called, is certainly excessive; indeed it becomes rabid."

Similar concerns have echoed throughout history about the radio, telephone, TV, and video games.

"It may sound comical in our modern context, but back then, when those new technologies were the latest distraction, they were probably really engaging. People spent too much time doing them," Feifer says. "And what can we say about that now, having seen it play out over and over and over again? We can say it's common. It's a common behavior. Doesn't mean it's the healthiest one. It's just not a medical problem."

Few today would argue that novels are in-and-of-themselves addictive — regardless of how voraciously you may have consumed your last favorite novel. So, what happened? Were these things ever addictive — and if not, what was happening in these moments of concern?

People are complicated, our relationship with new technology is complicated, and addiction is complicated — and our efforts to simplify very complex things, and make generalizations across broad portions of the population, can lead to real harm.

JASON FEIFER HOST OF BUILD FOR TOMORROW

There's a risk of pathologizing normal behavior, says Joel Billieux, professor of clinical psychology and psychological assessment at the University of Lausanne in Switzerland, and guest on the podcast. He's on a mission to understand how we can suss out what is truly addictive behavior versus what is normal behavior that we're calling addictive.

For Billieux and other professionals, this isn't just a rhetorical game. He uses the example of gaming addiction, which has come under increased scrutiny over the past half-decade. The language used around the subject of gaming addiction will determine how behaviors of potential patients are analyzed — and ultimately what treatment is recommended.

"For a lot of people you can realize that the gaming is actually a coping (mechanism for) social anxiety or trauma or depression," says Billieux.

"Those cases, of course, you will not necessarily target gaming per se. You will target what caused depression. And then as a result, If you succeed, gaming will diminish."

In some instances, a person might legitimately be addicted to gaming or technology, and require the corresponding treatment — but that treatment might be the wrong answer for another person.

"None of this is to discount that for some people, technology is a factor in a mental health problem," says Feifer.

"I am also not discounting that individual people can use technology such as smartphones or social media to a degree where it has a genuine negative impact on their lives. But the point here to understand is that people are complicated, our relationship with new technology is complicated, and addiction is complicated — and our efforts to simplify very complex things, and make generalizations across broad portions of the population, can lead to real harm."

Behavioral addiction is a notoriously complex thing for professionals to diagnose — even more so since the latest edition of the Diagnostic and Statistical Manual of Mental Disorders (DSM-5), the book professionals use to classify mental disorders, introduced a new idea about addiction in 2013.

"The DSM-5 grouped substance addiction with gambling addiction — this is the first time that substance addiction was directly categorized with any kind of behavioral addiction," Feifer says.

"And then, the DSM-5 went a tiny bit further — and proposed that other potentially addictive behaviors require further study."

This might not sound like that big of a deal to laypeople, but its effect was massive in medicine.

"Researchers started launching studies — not to see if a behavior like social media use can be addictive, but rather, to start with the assumption that social media use is addictive, and then to see how many people have the addiction," says Feifer.

Learned helplessness

The assumption that a lot of us are addicted to technology may itself be harming us by undermining our autonomy and belief that we have agency to create change in our own lives. That's what Nir Eyal, author of the books Hooked and Indistractable, calls 'learned helplessness.'

"The price of living in a world with so many good things in it is that sometimes we have to learn these new skills, these new behaviors to moderate our use," Eyal says. "One surefire way to not do anything is to believe you are powerless. That's what learned helplessness is all about."

So if it's not an addiction that most of us are experiencing when we check our phones 90 times a day or are wondering about what our followers are saying on Twitter — then what is it?

"A choice, a willful choice, and perhaps some people would not agree or would criticize your choices. But I think we cannot consider that as something that is pathological in the clinical sense," says Billieux.

Of course, for some people technology can be addictive.

"If something is genuinely interfering with your social or occupational life, and you have no ability to control it, then please seek help," says Feifer.

But for the vast majority of people, thinking about our use of technology as a choice — albeit not always a healthy one — can be the first step to overcoming unwanted habits.

For more, be sure to check out the Build for Tomorrow episode here.

Why the U.S. and Belgium are culture buddies

The Inglehart-Welzel World Cultural map replaces geographic accuracy with closeness in terms of values.

According to the latest version of the Inglehart-Welzel World Cultural Map, Belgium and the United States are now each other's closest neighbors in terms of cultural values.

Credit: World Values Survey, public domain.
Strange Maps
  • This map replaces geography with another type of closeness: cultural values.
  • Although the groups it depicts have familiar names, their shapes are not.
  • The map makes for strange bedfellows: Brazil next to South Africa and Belgium neighboring the U.S.
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