Thursday, March 27, 2008

The Psychology of Money: We're happier spending on others than ourselves

An article published in Science last week included three studies from different angles all pointing to the same conclusion: people who spend their money on other people rather than on themselves are happier.

  • The researchers analyzed the responses of a representative sample of hundreds of Americans who were asked questions about their spending and their level of happiness. They found that while the level of personal spending had no connection to people's happiness, spending on others-- charitable donations as well as purchases for friends and family-- was correlated with their levels of happiness:
    "Regardless of how much income each person made," Dunn said, "those who spent money on others reported greater happiness, while those who spent more on themselves did not."
  • They also recorded the happiness levels of a small group of employees before and after receiving a $3,000-$8,000 bonus, and also asked what they'd done with the money. They found that those who gave to others reported higher levels of happiness after they'd done it. From the Boston Globe:
    What they found, said Michael I. Norton, assistant professor at Harvard Business School, was that "the size of the bonus you get has no relation to how happy you are, but the amount you spend on other people does predict how happy you are."

    The study is published in this week's edition of the journal Science.

    The researchers used a five-point scale, asking people, "Do you feel happy in general?" There were five answers provided: yes, most of the time, sometimes, rarely, or no.

    They found that people could expect to go up a full point on the scale if they spent about a third of the bonus on others, Dunn said, calling it prosocial spending.

    "So, if before receiving their bonus, both Tim and Dan said they were happy sometimes, and Dan spent a third of his bonus prosocially, while Tim spent none of it prosocially, then after spending the bonus, we would expect Dan to tell us he was happy 'most of the time,' " Dunn explained.

  • And the researchers also conducted a study with college students, giving them either a $5 or $20 bill to spend that day-- randomly assigning half of them to spend it on themselves and the other half to spend it on others. When the students returned that evening and reported on their happiness levels, those who'd given to others were happier than those who'd spent the money on themselves. In other words, these subjects were randomly chosen and gave money away because they were were told to-- and it still made them happier than spending on themselves.

It seems to me that there are a few things to learn from this study. There's the obvious conclusion that spending on others seems to improve happiness-- and while these particular studies focus on giving financially, there's evidence that other types of giving (like volunteering, or being a good listener for friends or family) make people happier, too. (Check out Free Money Finance's review of the book Why Good Things Happen to Good People, for starters.)

But it's also important to note what the research says about the effects of spending on yourself, and how it may differ from what we'd expect. The researchers described the "spend $5 or $20 in a day" study to another group of students, and most of them expected that they'd be happier after spending on themselves rather than on others. Yet we know that the researchers found the opposite... and the national survey found no correlation between people's personal spending and their happiness. So it's not just that spending on other people makes us happy-- it's also that spending on ourselves generally doesn't, even though we think it will.

Do these results ring true to you? Is this something you've noticed previously, and if so, have you made decisions based on it to improve your happiness levels? If this is new to you, are you thinking about making some changes?

The Psychology of Money is an ongoing series that highlights some insights we can gain about ourselves and our personal finance decisions from psychological research; click here for previous posts.


Lisa said...

I think you're right. I'll often pass up something for myself, but not for my spouse! Nice post. I like your website.


Jayesh said...

How true! MoneyLIFE, a fortnightly personal finance magazine is like a finance psychiatrist for all who are concerned about managing finances.

Thanks for this thought.