Harvard Researchers: Money Can Buy Happiness, Depending On How You Spend It

Having money may not buy happiness, but spending cash on life experiences might bring people a certain amount of joy.

That’s what Michael Norton, a Harvard Business School professor and co-author of the book Happy Money: The Science of Smarter Spending, discovered in his research.

“Even something small, like going out for a meal or little shifts in how you spend $5 or $10 can bring more happiness to people … because experiences are more emotionally involving,” than simply buying “stuff,” said Norton. “We use stuff by ourselves, whereas, being with other people is a pretty big predictor of happiness.”

Norton’s book, which he wrote with fellow Harvard professor Elizabeth Dunn, is based on years of behavioral science data and research, which led the authors to their conclusion that the way people spend their earnings can greatly influence their overall mood and perception on life.

Norton said part of the reason that experiences pay off in the long-term—over something like purchasing a new television—is because material objects depreciate, while vacations and other experiences become fond memories that get better in our minds. “Experiences get rosier in our memories over time,” he said. “Every time we think back, those memories get better and better and better. So not only at the time of purchase are they better, but overtime they are, too.”

He said being a consumer has a drug-like effect, where the results are immediate and sometimes fulfilling, but never last long. “Moment of purchase is great, and partly that’s because you are fantasizing about how amazing something will be in the future. Really what people are committing to, though, is staring at a wall by themselves for thousands of hours, if they buy something like a TV,” said Norton. “When we buy things, we have this belief that things will be amazing. In a week, that is worn off.”

Norton and Dunn’s book is supported by psychological research conducted by Leaf Van Boven, of the University of Colorado at Boulder, and Thomas Gilovich, of Cornell University, who examined “discretionary spending on material purchases—such as jewelry or clothing—and experiential ones,” like vacations or tickets to a concert, according to Pyschology Today, which published their findings. The research indicated—while varying between male and female subjects—that people were “… much more likely to claim that a prior experiential purchase made them happier than a material one.”

Norton’s work, however, takes that initial concept and expands on it. His findings also offer readers advice on the actual science of spending, earning, saving, and investing, and how it is tied to emotional feelings such as happiness. “Basically each chapter is a different way to think about spending your money to get more happiness out of it,” he said. “Money matters, but social experiences and that feeling that you maybe had an impact on someone’s life—these are things that are helpful for your overall being.”

Norton and Dunn supplemented their work with video experiments where they handed strangers cash and asked them to go out and buy an experience, or spend it helping someone else. “I think the experiences, and spending on others are two things that resonate for people,” he said.

Norton and Dunn also coined the term “IKEA effect” while conducting research, which is the idea that something purchased, but also constructed or made by a consumer, is a double whammy—it offers both an experience, and a short-term fulfillment based on spending. “You can buy something pre-made, and you get it and put it on the shelf, Or you get something that you buy yourself, it becomes experiential and you become much more attached to,” he said.

While their book is a few months old, the pair is expanding their research, and recently tapped into a large financial firm—which Norton wouldn’t name—to survey workers about their net worth, and how their money makes them feel. The survey looks at people who have millions of dollars, in varying degrees. He said so far, their findings indicate that people with lots of money always say if they had a little more, they would be happier. “People in each category said they needed double their money in order to be happy. More is not worse, but it doesn’t seem to pay off in the way people think it will.”