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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.
- 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.
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.
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.
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.
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Scientists discover what our human ancestors were making inside the Wonderwerk Cave in South Africa 1.8 million years ago.
- Researchers find evidence of early tool-making and fire use inside the Wonderwerk Cave in Africa.
- The scientists date the human activity in the cave to 1.8 million years ago.
- The evidence is the earliest found yet and advances our understanding of human evolution.
One of the oldest activities carried out by humans has been identified in a cave in South Africa. A team of geologists and archaeologists found evidence that our ancestors were making fire and tools in the Wonderwerk Cave in the country's Kalahari Desert some 1.8 million years ago.
A new study published in the journal Quaternary Science Reviews from researchers at the Hebrew University of Jerusalem and the University of Toronto proposes that Wonderwerk — which means "miracle" in Afrikaans — contains the oldest evidence of human activity discovered.
"We can now say with confidence that our human ancestors were making simple Oldowan stone tools inside the Wonderwerk Cave 1.8 million years ago," shared the study's lead author Professor Ron Shaar from Hebrew University.
Oldowan stone tools are the earliest type of tools that date as far back as 2.6 million years ago. An Oldowan tool, which was useful for chopping, was made by chipping flakes off of one stone by hitting it with another stone.
An Oldowan stone toolCredit: Wikimedia / Public domain
Professor Shaar explained that Wonderwerk is different from other ancient sites where tool shards have been found because it is a cave and not in the open air, where sample origins are harder to pinpoint and contamination is possible.
Studying the cave, the researchers were able to pinpoint the time over one million years ago when a shift from Oldowan tools to the earliest handaxes could be observed. Investigating deeper in the cave, the scientists also established that a purposeful use of fire could be dated to one million years back.
This is significant because examples of early fire use usually come from sites in the open air, where there is the possibility that they resulted from wildfires. The remnants of ancient fires in a cave — including burned bones, ash, and tools — contain clear clues as to their purpose.
To precisely date their discovery, the researchers relied on paleomagnetism and burial dating to measure magnetic signals from the remains hidden within a sedimentary rock layer that was 2.5 meters thick. Prehistoric clay particles that settled on the cave floor exhibit magnetization and can show the direction of the ancient earth's magnetic field. Knowing the dates of magnetic field reversals allowed the scientists to narrow down the date range of the cave layers.
The Kalahari desert Wonderwerk CaveCredit: Michael Chazan / Hebrew University of Jerusalem
Professor Ari Matmon of Hebrew University used another dating method to solidify their conclusions, focusing on isotopes within quartz particles in the sand that "have a built-in geological clock that starts ticking when they enter a cave." He elaborated that in their lab, the scientists were "able to measure the concentrations of specific isotopes in those particles and deduce how much time had passed since those grains of sand entered the cave."
Finding the exact dates of human activity in the Wonderwerk Cave could lead to a better understanding of human evolution in Africa as well as the way of life of our early ancestors.
If you ask your maps app to find "restaurants that aren't McDonald's," you won't like the result.
- The Chinese Room thought experiment is designed to show how understanding something cannot be reduced to an "input-process-output" model.
- Artificial intelligence today is becoming increasingly sophisticated thanks to learning algorithms but still fails to demonstrate true understanding.
- All humans demonstrate computational habits when we first learn a new skill, until this somehow becomes understanding.
It's your first day at work, and a new colleague, Kendall, catches you over coffee.
"You watch the game last night?" she says. You're desperate to make friends, but you hate football.
"Sure, I can't believe that result," you say, vaguely, and it works. She nods happily and talks at you for a while. Every day after that, you live a lie. You listen to a football podcast on the weekend and then regurgitate whatever it is you hear. You have no idea what you're saying, but it seems to impress Kendall. You somehow manage to come across as an expert, and soon she won't stop talking football with you.
The question is: do you actually know about football, or are you imitating knowledge? And what's the difference? Welcome to philosopher John Searle's "Chinese Room."
The Chinese Room
Searle's argument was designed as a critique of what's called a "functionalist" view of mind. This is the philosophy that argues that our mind can be explained fully by what role it plays, or in other words, what it does or what "function" it has.
One form of functionalism sees the human mind as following an "input-process-output" model. We have the input of our senses, the process of our brains, and a behavioral output. Searle thought this was at best an oversimplification, and his Chinese Room thought experiment goes to show how human minds are not simply biological computers. It goes like this:
Imagine a room, and inside is John, who can't speak a word of Chinese. Outside the room, a Chinese person sends a message into the room in Chinese. Luckily, John has an "if-then" book for Chinese characters. For instance, if he gets <你好吗>, the proper reply is <我还好>. All John has to do is follow his instruction book.
The Chinese speaker outside of the room thinks they're talking to someone inside who knows Chinese. But in reality, it's just John with his fancy book.
What is understanding?
Does John understand Chinese? The Chinese Room is, by all accounts, a computational view of the mind, yet it seems that something is missing. Truly understanding something is not an "if-then" automated response. John is missing that sinking in feeling, the absorption, the bit of understanding that's so hard to express. Understanding a language doesn't work like this. Humans are not Google Translate.
And yet, this is how AIs are programmed. A computer system is programmed to provide a certain output based on a finite list of certain inputs. If I double click the mouse, I open a file. If you type a letter, your monitor displays tiny black squiggles. If we press the right buttons in order, we win at Mario Kart. Input — Process — Output.
Can imitation become so fluid or competent that it is understanding.
But AIs don't know what they're doing, and Google Translate doesn't really understand what it's saying, does it? They're just following a programmer's orders. If I say, "Will it rain tomorrow?" Siri can look up the weather. But if I ask, "Will water fall from the clouds tomorrow?" it'll be stumped. A human would not (although they might look at you oddly).
A fun way to test just how little an AI understands us is to ask your maps app to find "restaurants that aren't McDonald's." Unsurprisingly, you won't get what you want.
The Future of AI
To be fair, the field of artificial intelligence is just getting started. Yes, it's easy right now to trick our voice assistant apps, and search engines can be frustratingly unhelpful at times. But that doesn't mean AI will always be like that. It might be that the problem is only one of complexity and sophistication, rather than anything else. It might be that the "if-then" rule book just needs work. Things like "the McDonald's test" or AI's inability to respond to original questions reveal only a limitation in programming. Given that language and the list of possible questions is finite, it's quite possible that AI will be able to (at the very least) perfectly mimic a human response in the not too distant future.
What's more, AIs today have increasingly advanced learning capabilities. Algorithms are no longer simply input-process-output but rather allow systems to search for information and adapt anew to what they receive.
A notorious example of this occurred when a Microsoft chat bot started spouting bigotry and racism after "learning" from what it read on Twitter. (Although, this might just say more about Twitter than AI.) Or, more sinister perhaps, two Facebook chat bots were shut down after it was discovered that they were not only talking to each other but were doing so in an invented language. Did they understand what they were doing? Who's to say that, with enough learning and enough practice, an AI "Chinese Room" might not reach understanding?
Can imitation become understanding?
We've all been a "Chinese Room" at times — be it talking about sports at work, cramming for an exam, using a word we didn't entirely know the meaning of, or calculating math problems. We can all mimic understanding, but it also begs the question: can imitation become so fluid or competent that it is understanding.
The old adage "fake it, 'till you make it" has been proven true over and over. If you repeat an action enough times, it becomes easy and habitual. For instance, when you practice a language, musical instrument, or a math calculation, then after a while, it becomes second nature. Our brain changes with repetition.
So, it might just be that we all start off as Chinese Rooms when we learn something new, but this still leaves us with a pertinent question: when, how, and at what point does John actually understand Chinese? More importantly, will Siri or Alexa ever understand you?
With the rise of Big Data, methods used to study the movement of stars or atoms can now reveal the movement of people. This could have important implications for cities.
- A treasure trove of mobility data from devices like smartphones has allowed the field of "city science" to blossom.
- I recently was part of team that compared mobility patterns in Brazilian and American cities.
- We found that, in many cities, low-income and high-income residents rarely travel to the same geographic locations. Such segregation has major implications for urban design.
Almost 55 percent of the world's seven billion people live in cities. And unless the COVID-19 pandemic puts a serious — and I do mean serious — dent in long-term trends, the urban fraction will climb almost to 70 percent by midcentury. Given that our project of civilization is staring down a climate crisis, the massive population shift to urban areas is something that could really use some "sciencing."
Is urbanization going to make things worse? Will it make things better? Will it lead to more human thriving or more grinding poverty and inequality? These questions need answers, and a science of cities, if there was such a thing, could provide answers.
Good news. There already is one!
The science of cities
With the rise of Big Data (for better or worse), scientists from a range of disciplines are getting an unprecedented view into the beating heart of cities and their dynamics. Of course, really smart people have been studying cities scientifically for a long time. But Big Data methods have accelerated what's possible to warp speed. As "exhibit A" for the rise of a new era of city science, let me introduce you to the field of "human mobility" and a new study just published by a team I was on.
Credit: nonnie192 / 405009778 via Adobe Stock
Human mobility is a field that's been amped up by all those location-enabled devices we carry around and the large-scale datasets of our activities, such as credit card purchases, taxi rides, and mobile phone usage. These days, all of us are leaving digital breadcrumbs of our everyday activities, particularly our movements around towns and cities. Using anonymized versions of these datasets (no names please), scientists can look for patterns in how large collections of people engage in daily travel and how these movements correlate with key social factors like income, health, and education.
There have been many studies like this in the recent past. For example, researchers looking at mobility patterns in Louisville, Kentucky found that low-income residents tended to travel further on average than affluent ones. Another study found that mobility patterns across different socioeconomic classes exhibit very similar characteristics in Boston and Singapore. And an analysis of mobility in Bogota, Colombia found that the most mobile population was neither the poorest nor the wealthiest citizens but the upper-middle class.
These were all excellent studies, but it was hard to make general conclusions from them. They seemed to point in different directions. The team I was part of wanted to get a broader, comparative view of human mobility and income. Through a partnership with Google, we were able to compare data from two countries — Brazil and the United States — of relatively equal populations but at different points on the "development spectrum." By comparing mobility patterns both within and between the two countries, we hoped to gain a better understanding of how people at different income levels moved around each day.
Mobility in Brazil vs. United States
Socioeconomic mobility "heatmaps" for selected cities in the U.S. and Brazil. The colors represent destination based on income level. Red depicts destinations traveled by low-income residents, while blue depicts destinations traveled by high-income residents. Overlapping areas are colored purple.Credit: Hugo Barbosa et al., Scientific Reports, 2021.
The results were remarkable. In a figure from our paper (shown above), it's clear that we found two distinct kinds of relationship between income and mobility in cities.
The first was a relatively sharp distinction between where people in lower and higher income brackets traveled each day. For example, in my hometown of Rochester, New York or Detroit, the places visited by the two income groups (e.g., job sites, shopping centers, doctors' offices) were relatively partitioned. In other words, people from low-income and high-income neighborhoods were not mixing very much, meaning they weren't spending time in the same geographical locations. In addition, lower income groups traveled to the city center more often, while upper income groups traveled around the outer suburbs.
The second kind of relationship was exemplified by cities like Boston and Atlanta, which didn't show this kind of partitioning. There was a much higher degree of mixing in terms of travel each day, indicating that income was less of a factor for determining where people lived or traveled.
In Brazil, however, all the cities showed the kind of income-based segregation seen in U.S. cities like Rochester and Detroit. There was a clear separation of regions visited with practically no overlap. And unlike the U.S., visits by the wealthy were strongly concentrated in the city centers, while the poor largely traversed the periphery.
Data-driven urban design
Our results have straightforward implications for city design. As we wrote in the paper, "To the extent that it is undesirable to have cities with residents whose ability to navigate and access resources is dependent on their socioeconomic status, public policy measures to mitigate this phenomenon are the need of the hour." That means we need better housing and public transportation policies.
But while our study shows there are clear links between income disparity and mobility patterns, it also shows something else important. As an astrophysicist who spent decades applying quantitative methods to stars and planets, I am amazed at how deep we can now dive into understanding cities using similar methods. We have truly entered a new era in the study of cities and all human systems. Hopefully, we'll use this new power for good.
A small percentage of people who consume psychedelics experience strange lingering effects, sometimes years after they took the drug.