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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.

(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.

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  • Researchers have found that some basic words appear to be more memorable than others.
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Cognitive psychologist Weizhen Xie (Zane) of the NIH's National Institute of Neurological Disorders and Stroke (NINDS) works with people who have intractable epilepsy, a form of the disorder that can't be controlled with medications. During research into the brain activity of patients, he and his colleagues discovered something odd about human memory: It appears that certain basic words are consistently more memorable than other basic words.

The research is published in Nature Human Behaviour.

An odd find

Image source: Tsekhmister/Shutterstock

Xie's team was re-analyzing memory tests of 30 epilepsy patients undertaken by Kareem Zaghloul of NINDS.

"Our goal is to find and eliminate the source of these harmful and debilitating seizures," Zaghloul said. "The monitoring period also provides a rare opportunity to record the neural activity that controls other parts of our lives. With the help of these patient volunteers we have been able to uncover some of the blueprints behind our memories."

Specifically, the participants were shown word pairs, such as "hand" and "apple." To better understand how the brain might remember such pairings, after a brief interval, participants were supplied one of the two words and asked to recall the other. Of the 300 words used in the tests, five of them proved to be five times more likely to be recalled: pig, tank, doll, pond, and door.

The scientists were perplexed that these words were so much more memorable than words like "cat," "street," "stair," "couch," and "cloud."

Intrigued, the researchers looked at a second data source from a word test taken by 2,623 healthy individuals via Amazon's Mechanical Turk and found essentially the same thing.

"We saw that some things — in this case, words — may be inherently easier for our brains to recall than others," Zaghloul said. That the Mechanical Turk results were so similar may "provide the strongest evidence to date that what we discovered about how the brain controls memory in this set of patients may also be true for people outside of the study."

Why understanding memory matters

person holding missing piece from human head puzzle

Image source: Orawan Pattarawimonchai/Shutterstock

"Our memories play a fundamental role in who we are and how our brains work," Xie said. "However, one of the biggest challenges of studying memory is that people often remember the same things in different ways, making it difficult for researchers to compare people's performances on memory tests." He added that the search for some kind of unified theory of memory has been going on for over a century.

If a comprehensive understanding of the way memory works can be developed, the researchers say that "we can predict what people should remember in advance and understand how our brains do this, then we might be able to develop better ways to evaluate someone's overall brain health."

Party chat

Image source: joob_in/Shutterstock

Xie's interest in this was piqued during a conversation with Wilma Bainbridge of University of Chicago at a Christmas party a couple of years ago. Bainbridge was, at the time, wrapping up a study of 1,000 volunteers that suggested certain faces are universally more memorable than others.

Bainbridge recalls, "Our exciting finding is that there are some images of people or places that are inherently memorable for all people, even though we have each seen different things in our lives. And if image memorability is so powerful, this means we can know in advance what people are likely to remember or forget."

spinning 3D model of a brain

Temporal lobes

Image source: Anatomography/Wikimedia

At first, the scientists suspected that the memorable words and faces were simply recalled more frequently and were thus easier to recall. They envisioned them as being akin to "highly trafficked spots connected to smaller spots representing the less memorable words." They developed a modeling program based on word frequencies found in books, new articles, and Wikipedia pages. Unfortunately, the model was unable to predict or duplicate the results they saw in their clinical experiments.

Eventually, the researchers came to suspect that the memorability of certain words was linked to the frequency with which the brain used them as semantic links between other memories, making them often-visited hubs in individuals's memory networks, and therefore places the brain jumped to early and often when retrieving memories. This idea was supported by observed activity in participants' anterior temporal lobe, a language center.

In epilepsy patients, these words were so frequently recalled that subjects often shouted them out even when they were incorrect responses to word-pair inquiries.

Seek, find

Modern search engines no longer simply look for raw words when resolving an inquiry: They also look for semantic — contextual and meaning — connections so that the results they present may better anticipate what it is you're looking for. Xie suggests something similar may be happening in the brain: "You know when you type words into a search engine, and it shows you a list of highly relevant guesses? It feels like the search engine is reading your mind. Well, our results suggest that the brains of the subjects in this study did something similar when they tried to recall a paired word, and we think that this may happen when we remember many of our past experiences."

He also notes that it may one day be possible to leverage individuals' apparently wired-in knowledge of their language as a fixed point against which to assess the health of their memory and brain.


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