16 Jul 2013

Happy Money, The Science of Smarter Spending

In our podcast launch, Brian talks to Michael I. Norton, co-author of the book Happy Money: The Science of Smarter Spending, about why Mike says changing how we spend our money makes us happier.

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Brian Kenny: Today we're hearing from Mike Norton, associate professor of business administration in the marketing unit, and Marvin Bower Fellow at the Harvard Business School. He's also the co-author of the book Happy Money: The Science of Smarter Spending, along with Elizabeth Dunn, associate professor of psychology at the University of British Columbia. Thanks for joining us Mike.

Mike Norton: Thanks for having me.

BK: When I read your book I was reminded of a quote by David Lee Roth, the former singer of the band Van Halen. He said something like, "Money might not be able to buy you happiness, but it can sure you buy you a boat big enough to sail alongside of it."

MN: I think David Lee Roth is the Poet Laureate now of the United States, I'm pretty sure. Unfortunately he's wrong. So it turns out that money can buy you happiness, so he's not wrong about that. But buying things like boats is exactly the wrong way to try to get happy with your money. So in general when people get more money or when they think about getting more money, what they think about doing is buying stuff. Houses, and cars, and in his case obviously a boat. And those things don't make you unhappy necessarily, but they don't make people much happier. A lot of research says you get excited about getting stuff, then you get it and it doesn't do anything for you. But there are other things you can do that will make you happier when you spend your money.

BK: Mhm. Can we talk about what led you to do this research? Why did you decide that this was a topic that was worth looking at?

MN: We had looked, my co-author Liz Dunn and I, had looked to see about really research on money in general, because it's such an important part of what we do every day. We're always thinking about do we have enough money, how can we get more money -- and that's true of poor people and rich people and everybody in the world. And there were a million books and articles and newspaper articles on how to save money, how to invest money, how to think about picking a job, all of these kinds of things, but there was literally almost nothing on: once you have money, what should you do with it? Nothing. We couldn't find anything. And we said maybe we should do some research to figure out, if you get some amount of money, how should you spend it to get the most happiness out of it? And the way we did it, literally, in experiments, was just give people money, and make people spend it in a bunch of different ways, and ask them how happy they were, and then we can start to rank things and say this is better than that, and this is better than that.

BK: Mhm. So you literally walked up to people on the street and handed them cash. What kind of reactions did you get?

MN: People are very excited about getting money. And then when we tell them they have to spend it in a certain way they get a little less happy, because what they want to do, so we'll often tell them to spend it, for example, on somebody else, or spend it on experience, and what they wanna do, like David Lee Roth, is spend it on stuff for themselves. So they think that we're telling them to do the wrong thing with the money, because they think they know how to get happiness out of it. But it turns out that when we let them do whatever they want, they buy stuff and they don't get happy. But when we make them do what we want them to do, they'll get happier.

BK: And tell us some of the things you wanted them to do, what were your instructions?

MN: One of the biggest ones actually, which you mentioned, is to buy experiences. So if you were to buy a boat, and actually use it for experiences, that would be good for your happiness. The problem is, what people do when they buy a boat is they dock it and they never ever use it. And the idea that having a dock, a boat and a dock somewhere, would make you happy… why would that make you happy? You never see it, you never use it. But when you use money to buy experiences like a trip on a boat, those are things that really do make people happier. We get more excited before them, it's more exciting during the experience than watching TV, and afterward when we look back, it's more fun to remember experiences than it is to remember watching TV. So they beat stuff on every level, before during and after.

BK: And you talk about the fact that the boat will always just be the boat, but the experience can actually get better as time goes on. You can remember things, and enhance them with your own memory.

MN: And the boat, if anything, is going to just get worse and worse, and crummier and crummier over time, but experiences in our memory get better and better and better. People remember their wedding as being this magical event, but in fact their uncle got drunk and vomited. But you forget that, and you remember the good parts.

BK: There's also an old saying that the happiest day in a boat owner's life are the day when the buy the boat, and the day they sell the boat. So that's true. There was a number that you landed on in your research: $75,000 is your sort of maxed out your happiness potential. Is that the right way to think about that?

MN: When we look across -- so we can ask a national sample of people in the United States, how happy are you? And we can ask them, how much money do you make? And then we can just very very simply plot a graph, and say at what point does more money stop doing much for you. And it turns out that right now in the United States, it's around, on average, and of course it varies from person to person, but on average around $75,000. After that, making more money, doesn't make you less happy, it just doesn't make you that much happier. If you're poor and you make more money, it does make a big difference. You worry less, you can meet your basic needs. After that it doesn't really matter. And then the question is why, why is it that if you made $75,000 and I gave you a million dollars, how could you not be happier if I gave you an extra million dollars than if you just had the $75,000? And the reason is because people take that million dollars and use them the wrong way. And again we say, quit doing that and use it in these different ways and let's see if we can get you to be happier.

BK: So for me, I have three kids, with a family of five, is that $75,000 for each member of my family? Because I'm trying to do the math in my own head and say, you know, we certainly would not be able to do the things that we do with $75,000, but how does that break down?

MN: So it is household income, but again it is on average, so certainly different people need different amounts of money. But the dilemma of course is, people who make $75,000 a year and let's say they have three kids. They live a creation lifestyle. So they're probably struggling to make ends meet because three kids are very expensive. People that make, let's say, $150,000, their life should be easier because they have the same number of kids but more money, but they change their lifestyle at the same time. So you don't stay in the house you were in before when your income doubles, you buy a house that's twice as big. And now your mortgage payment is twice as large, and now you're right back in the situation you were in before, where you don't have enough money to make ends meet. If we kept our life the same when we made more money, we'd be happier with the money. But we don't, we double everything when we double our salary, and then we're back in the thing where, "How are we going to pay for all these bills?" And that's partly why more money doesn't make us happier, because we don't use in the way that we should.

BK: And you do hear about the phenomenon a lot of people who come into a windfall of money, who change their lifestyle drastically and then frequently wind up not having any money at the end of that. So I think about lottery winners, and lots of documented cases of that.

MN: Absolutely. People win a million dollars in the lottery and they spend two million. Then you're not rich anymore. They also actually report it ruins all of their social relationships because all of their friends start asking them for money all the time, and so you're actually worse off: you should've given up the million dollars and stayed where you were. You'd be a lot happier.

BK: Mhm. You've looked at some examples of how companies are using this. If I'm a business leader and I'm looking at your research, how do I apply that to my employees and my costumers in productive ways?

MN: So one of the ways that we've shown, Liz and I in our research, that is a particularly difficult for people to change what they do to get more happiness is actually to quit spending on themselves at all, and give money away. That can include giving money to charity, it can include buying lunch for a friend, buying a gift for someone you care about, whatever the other focus thing is, that's much better for happiness than spending on yourself. And we said after we showed this a lot at the individual level, people when they do these sorts of things, and give to others, are happier. We said, how can we build this into organizations? So one way we do it is imagine companies that, instead of giving their employees bonuses for themselves, you know you did a great job this year here's your bonus check, we say, "You did a great job this year, here's a bonus and spend it on a teammate. Spend it on a coworker." And when we do experiments in companies, teams that spend on each other actually perform better than teams that just get regular bonuses for themselves. And you can imagine why, because if you and I did something nice for each other this week, well now we like each other more, the team is more cohesive and we'll perform better. And we've also done the same thing with customers. Imagine instead of getting a gift certificate to a store, that says $25 off your next purchase, you get a gift certificate that says, here's $25 to give to charity. And then after that we can measure: do people buy more stuff at the retailer that let them buy something for themselves, or that let them give money to charity? And it turns out that people come back faster to retailers who let them give than retailers who give them money to spend on stuff.

BK: You're not saying we do this at the expense of giving people raises, because clearly people are still motivated by that kind of reward too.

MN: Absolutely, and the same with giving regular stuff to customers for marketing. So they like discounts, they like coupons, but firms that do these pro-social, we call them pro-social bonuses, or prosocial incentives, it's such a different thing. You're so not accustomed to getting this from a company, that they're also very memorable and people talk a lot about them: "Did you know the company is doing this kind of thing?" Whereas a regular bonus or a regular coupon, they don't usually create a lot of buzz within organizations or within customers because it's business as usual.

BK: Right. And that's great for a brand too, cause there's sort of ancillary benefit there. Google's one of the companies that you point to that's also doing something interesting with vacation time.

MN: So they have this wonderful policy that actually we've learned over time that more companies have than we thought, but every company should have, if you think about it. So what Google does is, of course everyone gets vacation days, and everyone gets sick days, and everyone gets personal days, most companies have some combination of those things. And people often use their personal days for example when a family member is ill. You'll take, whether it's your child or parent or whoever, you'll take a personal day. But when a family member has a long illness, you burn through your personal days, you burn through your sick days, then people use their vacation days, and then what do you do? And what Google allows employees to do is if you had a family member who had an illness and you were out of days, I can actually donate my vacation to you. And you can take it, and use it to help your family member. I give up a couple days on the beach somewhere, which is a little sad but I'm a lot happier actually about helping you with your serious problem than another day on a beach. Employees report it's just an amazing thing where they really feel like the company cares a lot about them. From Google's standpoint obviously it makes no difference, because it's the same number of days out of work. For employees, they're just creating days amongst themselves. But the experience of giving to each other really change the dynamic.

BK: Do companies like Apple and Google do themselves a disservice when they introduce new models, right on the heels of one another? So I think about, you know, someone goes out and buys the latest Apple iPhone, they have three months to enjoy it, and feel happiness at the fact that they did that, or whatever experience that's creating, and then the next model is there and they're feeling some sort of remorse for not having waited.

MN: Absolutely. We see in our research time and time again that delaying things is a fantastic way to make people happier, even though it feels sort of difficult to wait for things to come, that it increases your happiness. So think about if Apple announced today, the new iPhone is coming out, and it's available tomorrow -- everyone would go out and buy it tomorrow, and they'd be happy because it's efficient. But what Apple does instead is they say the new iPhone's coming out in six months. And you'd think that's bad because I want it now, I don't want it in six months, but the anticipation of the six month wait drives people insane. And that's why people line up around the Apple Store for three hundred miles to try to get the new iPhone. They wouldn't do that if it were easily available and readily available all the time. When companies make people wait for things, it's like they pine for them, they can't wait for it to come, and the example we often use is Christmas. So Christmas can happen on any day, but parents put the gifts under the tree weeks before sometimes, and the kids just have to stare at them, and it's torture. But the excitement of those weeks is partly why kids love Christmas so much, is because the anticipation is so intense. We wouldn't choose it for ourselves, we'd rather have it right now, but retailers can help us get excited by making us wait for things.

BK: If there's one takeaway you want people to have from your research, with regard to this, why would it be?

MN: For us one of the biggest things that people are doing wrong and by people I also include myself, is we get very fixed within a purchase category, so if we're thinking of buying a new TV, and we go to the store, and there's a TV that costs $1000, and a TV that costs $1200, all we do when we're in that mindset is think about, "Which TV do I want?" What we should be thinking about is, both TV's are fine, both show us TV when we wanna see TV, one costs $200 more, and instead of comparing the features of the TV's, we should be thinking in our minds, "What could I do if I had $200, if I got the $1000 TV?" And the answer is, some amazing things. So if you think about, instead of within TV and rather think about your whole budget of money, it changes the way you think about things. So a friend of ours had this experience where he could not decide between a stereo that was $1000 and a stereo that was $1200. Finally the sales clerk said, "Why don't you get the $1000 one, and then you can buy $200 worth of music?" And he said, "Oh my god, of course that's what I want to do, $200 of music is…" -- and now it felt free, or something. And so you really change the way you think when you think about the opportunity cost of how you're spending. We really try to encourage people about, you know: "Which house should I buy?" is not the correct question, it's, "What should I do with my money to get the most happiness?" And maybe a smaller house makes perfect sense because you can use that money for something else that makes you happy.

BK: So is it worth sacrificing some happiness now to invest in something that might make you happy in the future?

MN: It can be. So if you think about your future happiness, that can be great. So if you're like, "When I retire, will I have enough money?" But one of the things that people of course don't do is, they can't project into the future anyway. So we just wrote a little op-ed for Prudential, for their retirees. We asked them, "How much money do you think you'll need a month to be happy when you retire?" And they give a number. And then we said, "Well, what do you want to do every month?" And they wrote, I want to do this, I want to do this. And they were underestimating by like half, how much they would need to be happy. So we're bad -- we're kinda good at thinking about the future, but we also just have no idea what we're doing. So now we're trying to get them to think about, "What would you need to be happy when you retire, every month?" Okay, well that's what you're saving for.

BK: Mike Norton, professor of business administration at Harvard Business School, and co-author of Happy Money: The Science of Smarter Spending. Thanks for joining us.

MN: Thank you.

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