It’s Not How Much You Earn, It’s How You Spend it!
By Shlomo Maital
As an aging economist (Ph.D. 1967), I want to propose a vote of thanks to the psychologists. They have saved my discipline from total irrelevance.
We economists for years asked, how can people, and countries, earn more and grow wealthier? How can we make more money?
Alas, it turns out, I and my colleagues were asking the wrong question. We ruined our planet by striving for continual economic growth, and created massive inequality in wealth and income distribution that is destabilizing nations and the world, by preaching extreme free-market theory that contributed to the 2008 financial collapse. Good work, economists.
So, what is the right question?
How can we SPEND our money better, both as individuals, as families, and as nations? Not how can we make more of it.
And a strong answer comes from solid research by psychologists Elizabeth Dunn, Lara Aknin and Michael Norton (U.B.C., Simon Fraser, and Harvard, respectively). *
They begin by asking, if you dug into a jacket pocket stored since winter, and found $20, would you spend it on yourself, give to a homeless person, or buy your partner a bouquet of tulips? They ask this, because “how people spend their money may be at least as important (for their happiness) as the amount of money they have”.
In their experiment, they gave people on a university campus $5, or $20, and asked them to spend it by the end of day. Half of the participants were told to spend the money on themselves. Half were told to spend the money on somone else (prosocial spending).
That evening, “people who had been assigned to spend the money on someone else reported happier moods over the course of the day than did those people assigned to spend the money on themselves”. And the amount of money the participants received had no bearing on their perceived happiness.
Interestingly, the economists’ fallacy prevails in our perceptions. “When we described the experiment to other participants, …they believed that they would be happier spending more money ($20 rather than $5) and that they would be happier spending it on themselves.”
In other words: We believe that selfishness promotes our happiness, and we believe that more (money) is better than less, two of the axioms of economic theory.
And we are wrong.
So, thanks psychologists! At the end of the day, just before I fall asleep, I review my day and what I achieved. Invariably, a day when I did something good for someone – family, friends, strangers – is one that leaves me falling asleep smiling. And when I wake, I remind myself to do things that will create that feeling later that evening.
Give it a try!
* Dunn, Aknin and Norton. “Prosocial spending and happiness: using money to benefit others pays off”. Current Directions in Psychological Science, vol. 23, 1, pp. 41-47, 2014.