Psychologists have been busy testing the premise that money can't buy happiness. Nobel prize-winning economist Daniel Kahneman has garnered lots of attention with research that says this largely is true. Beyond about $75,000 in annual income – enough to fund a moderately comfortable lifestyle – more money does not make people much happier, he said.
Not so fast, say two young academics. Elizabeth Dunn, an associate professor of psychology at the University of British Columbia, and Michael Norton, an associate professor of marketing at Harvard Business School, have written a new book called "Happy Money: The Science of Smarter Spending." In the book, they make a persuasive case that money does have the ability to buy happiness, and it's not how much money you have that matters, but how you spend it.
Much of the "money can't buy happiness" school of behavioral thought rests on a concept called hedonic adaptation: The human brain rapidly adjusts to what it senses. What's new today becomes ho-hum tomorrow. And so it is with material acquisitions. That shiny new car gives us immense happiness when we drive it off the lot. But we soon get used to it, and it ceases to provide much happiness. Ditto for other possessions.
Hedonic adaptation extends to human relationships. The torrid romance gives way to the memorable honeymoon, which is followed by the exciting early years of marriage and then often succeeded by a reality in which even the strongest marriage may become routine to both members of the happy couple.
The path to happiness, Dunn and Norton say in their short and engaging tour of the happiness landscape, is, in effect, an end run around the brain's adaptive power. They cite a wealth of research supporting the notion that we should spend money on a range of things besides material goods and services that the brain can adjust to. They also include solid examples of how people and organizations employ these principles to increase satisfaction and happiness.
In a jargon-free and anecdotal guide (hedonic adaptation is my phrase, not one you'll find in their book), the authors say, "Shifting from buying stuff to buying experiences, and from spending on yourself to spending on others, can have a dramatic impact on happiness." They set forth five key principles for what they call "happy money."
1. Buy experiences. The brain doesn't adapt as successfully to experiences. While things may wear out their welcome, experiences can provide increasing benefits over time. A memorable trip takes on even more luster with the passage of time. Even an unpleasant adventure may produce stories that grow in value as the years pass. The happiest experiences usually involve other people we care about, and thus tap into human beings' greatest source of meaning – social interaction.
2. Make it a treat. "Abundance, it turns out, is the enemy of appreciation," the authors write. Using your money for surprises can be a great way to produce happiness and bypass the brain's basket that collects and negates the benefits of the predictable and routine. Better still, it's possible to change the way we make even repeated material purchases and turn them back into the treats they were when you first began buying them. Human brains love surprises. Like other principles on the list, the happiness impact of treats can be amplified if they are produced using multiple principles.
3. Buy time. Having more time is a form of wealth that can be used to "buy" more happiness. So it can make sense to spend money to create both the reality and, of equal importance, the perception of what Dunn and Norton describe as "time affluence." It also turns out that giving away our time, through volunteer work for example, can make us feel even more time-affluent. We have time to spare. It's literally possible to buy more time by spending money on time-saving products and services. But the book also makes a strong pitch for spending less time on two of the least happy uses of time – television and commuting – and spending more time with family and friends.
4. Pay now, consume later. This principle is particularly appealing to me because it turns the basis of our debt-loaded "buy now, pay later" consumption economy on its head. Spending money is, literally, a pain to our brains. That's one major reason credit cards are so alluring; they separate the purchase from the pain.
But it turns out that paying in advance for something you will consume in the future does the same thing and turns the actual purchase into something our brains regard as being free. Buying pleasurable things and experiences ahead of time – such as a weekend spa getaway or vacation – also frees our minds to imagine all sorts of wonderful outcomes, and this anticipation can add to our happiness. Finally, it's also true that laying out the money ahead of time is an effective check on overspending. So we can get more happiness and spend less money.
"Because delaying consumption allows spenders to reap the pleasures of anticipation, without the buzzkill of reality," the authors say, "vacations provide the most happiness before they occur."
5. Invest in others. "Spending money on others provides a bigger happiness boost than spending money on yourself," Dunn and Norton write. They also cite research that this is not restricted to materialistic societies but is also true in relatively impoverished countries.
"The principles we've outlined should not be considered as independent from each other," they say. "You shouldn't either buy experiences or invest in others, but rather think about applying as many principles as you can in your daily spending. It's even possible to apply multiple principles with a single purchase."
Spending on others, to cite one example, can provide the biggest happiness bang for the buck when people invest in others in a way that connects them to other people and especially to other people they care about.
Turning the money you spend into happy money is hardly an automatic process. We have lots of inflexible spending requirements and habits and think things such as fancy homes and cars bring us happiness when research shows they don't.
"For one week, keep track of all the money you spend," Dunn and Norton suggest. "Rather than grouping your expenditures into the traditional categories used by the Bureau of Labor Statistics, try putting them into categories according to our five spending principles. Then take a close look at all the discretionary income you've spent that falls outside these categories – and see how much of it you can forego the following week."
Corrected on 05/20/13: A previous version of this story misspelled the name of Michael Norton.