Wednesday, December 21, 2011

How to get more bang from your bucks

The retailers may be worried we aren't spending enough this Christmas, but that doesn't mean most of us aren't spending a fair bit. We always do. And, of course, for those of us off on summer holidays, the spending doesn't stop on Christmas Eve.

Economists are great apostles of efficiency, which they advocate so we have more money to spend on consumption. Strangely, however, they have little interest in how efficiently we spend our money. Are we spending it in ways that maximise the satisfaction (or "utility") we derive? They hardly know or care.

For advice on consumption efficiency we must turn to the psychologists - particularly those who study happiness (another word for utility). Earlier this year three famous psychologists, Elizabeth Dunn, of the University of British Columbia, Daniel Gilbert, of Harvard, and Timothy Wilson, of the University of Virginia, published an article called, If money doesn't make you happy, then you probably aren't spending it right.

The truth is, once you've satisfied your basic needs, getting and spending more money is a progressively less effective way to make yourself happier. The more you spend, the less effective each extra dollar becomes.

But that's partly because some forms of spending are more satisfying than others, and Gilbert's research shows humans aren't very good at predicting what will make them happy.

So the authors propose some principles that psychological research suggests will help us get more bang from our bucks. One that's particularly apposite at this time when we celebrate the birth of Santa is: help others instead of yourself.

Somebody who had nothing to do with Santa once said it was more blessed to give than to receive. Turns out he was right. Dunn has done various experiments that show giving gifts to people or making donations to charity makes people happier than spending money on themselves.

Studies of people's brains using magnetic resonance imaging showed that when people chose to give money to a local food bank this caused activity in the part of their brain typically associated with receiving rewards.

Why should this be? Because humans are the most social animal on the planet, the quality of our social relationships is a strong determinant of our happiness. So almost anything we do to improve our connections with others tends to improve our happiness as well.

Particularly at this time of year, retailers try to entice us with offers to "buy now, pay later". I don't doubt this helps increase sales, but it's pretty much the opposite of how you gain greater satisfaction. Another principle the authors propose is: pay now and consume later.

Consume now, pay later is a bad idea because it eliminates anticipation, and anticipation is a source of "free" happiness, the authors say. Delayed gratification means you get the pleasure of thinking about how good it will be and then you get the pleasure of actually experiencing it. We also get pleasure from looking back on experiences, but we get more from anticipating them.

A third principle is: beware of comparison shopping. The trouble with comparison shopping is it focuses your attention on those attributes of the items that are easily compared, not necessarily the attributes most important to how much satisfaction you'll get from the item once you've got it home and are using it.

This may be particularly true of internet shopping, which is likely to increase the emphasis on the attribute that's most easily compared: price. That's fine - especially when you're comparing identical items. But price is only one consideration. More important ones are whether you really want the thing in the first place, and how much use you're likely to make of it.

The next principle seems odd: follow the herd instead of your head. Research suggests the best way to predict how much we'll enjoy an experience is to see how much someone else enjoyed it. That's because we're so bad at predicting our utility. It's probably also because, being such intensely social animals, we usually feel comfortable doing what everyone else is doing (even if we don't like admitting it).

Next: buy many small pleasures instead of a few big ones. Present-buying parents, please note. The reason the pleasure from acquiring new things wears off so soon is that we so quickly get used to them. Psychologists say we "adapt" to them. So a key tactic in seeking to increase the pleasure we get from things is to find ways of slowing our rate of adaptation. One way to do it is to buy a lot of little things and get satisfaction out of each of them rather than buy a few big hits.

And they say economists use jargon. See if you can translate this: "Across many different domains, happiness is more strongly associated with the frequency than the intensity of people's positive affective experiences." (Positive affect means good feelings.)

In a study of Belgians, those who had a strong capacity to savour the mundane joys of daily life were happier than those who didn't.

I've left for last a principle I've written about before: buy experiences instead of things. We adapt to the ownership of things more quickly than to experiences. We anticipate and remember experiences more than things.

Our experiences are more centrally connected to our identities. And experiences are more likely to bring us into connection with other people.

Turns out this is the retailers' problem. We're not spending less overall, we're just spending less of our income on the goods retailers sell and more on the services they don't. Overseas holidays, for instance. But not for me, this time. Come Boxing Day I'm off up the coast for a few weeks.