Investor Psychology Part 2: How can you buy happiness?

Close your eyes and picture the future. Society is wealthier than ever, people are living longer, and through technological advances, we have easy access to a plethora of information that’s beyond our wildest dreams.

Sounds wonderful, doesn’t it? You would assume that those lucky enough to live in that time would be happy and satisfied. What more could they possible want? Now open your eyes and look around. This is our world today — one that’s only truly taken shape in the last couple of decades. However, as a society, we aren’t any happier than we were in the past. How is this possible?

Although there are a number of reasons to explain why, simply put, we are really bad at predicting what makes us happy. In his Ted Talk, Daniel Gilbert asked, “Would you prefer to win the lottery or become a paraplegic?” The audience laughed at the seemingly ridiculousness of the question.

Well, in studies Gilbert was referencing, levels of reported happiness were measured in individuals a year after they won the lottery, and in individuals a year after they became paraplegics. Not surprisingly, the lottery winners were happier. However, the difference in happiness between the lottery winners and the paraplegics was surprisingly marginal.

Basically, we make our choices based on things we think will make us happy, but we just aren’t that good at knowing what those things are. For years, economists assumed everyone was an “Econ” — a rational individual who would easily choose options best for them. Well, just like how you don’t always choose a salad over a bowl of French fries, Econs largely don’t exist. Or if they do, I’ve yet to meet any of them.

Based in part on our genetics, we are ill-equipped for the modern world that relies heavily on money and spending it wisely. Since it doesn’t come naturally to us, many of us don’t have the time or energy to think things through with enough clarity to override our instincts. As a result, we’re usually wrong when making predictions about money and happiness.

Although happiness can be bought to a certain extent — some research indicates that once we make around $75,000 a year it’s difficult to improve the amount of happiness in our lives by making more money. However, by making better decisions with our money it is possible to attain higher levels of happiness.

Martin Seligman’s ground-breaking book, Flourish, is a great place to start. He provides the following acronym for what we need to be happy: PERMA.

• Positive emotions (feeling good)
• Engagement (Being completely absorbed in activities)
• Relationships (Having strong connections with people)
• Meaning (Having purpose in our lives)
• Achievement (Having a sense of accomplishment)

Seligman writes that combinations of these variables form the foundation for our well-being — each person requires a different amount from each need.

Wait, is there something missing? Where’s all the…stuff? Expensive cars, fancy clothes, big houses, etc. don’t actually contribute to our happiness. If cars are your true passion, then, of course, getting into a nice one makes you happy and produces positive emotions (the P in PERMA). But buying a flashy car for the sake of having a flashy car does little to fulfil your happiness quota.

If you seek happiness through the acquisition of things, you’ll eventually find yourself trapped on the hedonic treadmill. When this happens, material items lose their novelty and become the new normal. To continue down this path, you’ll have to keep buying new things — not very feasible, is it? Getting off the treadmill won’t feel good at first, like you’re taking a step backwards or cutting back, but it will be well worth it.

In the end what does it mean? Seligman might say that if you really do want to get the most bang for your buck, try investing in experiences, in activities that challenge you, and in socializing with the people you care about. Find out the combination of PERMA that works best for you. You won’t regret it!

In my next blog, I’ll discuss how to structure your finances to increase your level of happiness!