Given that it’s vacation season for many folks, we thought it a good time to devote this Mind Over Money post to a brief discussion of what personal finance is ultimately all about. Some people, of course, really enjoy counting their money, deriving great satisfaction simply from watching their bottom line grow, often quite removed from any thought of what they might do with their riches. But for most of us, money is just a token for what we can do with it — pay the mortgage or rent, send kids to college, buy a TV or travel to Italy. And for nearly all of us, money is finite; there isn’t enough to do all we want, so we must be selective. That raises a crucial question: If we want to maximize the happiness or satisfaction we get from our money, how should we spend it?
There’s been a lot of recent research on this subject, much of it conducted at Tom’s home institution, Cornell University (a lot of it by Tom). And the answer is clear. If you’re conflicted about whether to spend money on a material good (say, a computer) or personal experience (say, a vacation), the research says you’ll get much more satisfaction — and for longer — if you choose the experience. Most of us, it turns out, get more bang from the experiential buck. Indeed, when people are asked to recall their most significant material and experiential purchases over the previous five years, they report that the experience brought more joy, was a source of more enduring satisfaction and was more clearly “money well spent.”
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This might seem counter-intuitive. After all, when faced with a trade-off between doing and buying, many people opt for the material good because “it will still be there” long after the experience would have been enjoyed. In one sense that’s correct: The material good lasts while the experience is fleeting. But psychologically it’s the reverse. We quickly adapt to the material good, but the experience endures in the memories we cherish, the stories we tell and the very sense of who we are.
Experiences are often also more satisfying because we tend to evaluate them on their own terms, not in comparison to what others have. Imagine that you’ve just bought a new computer and are psyched to discover what it can do. Then you hear that a pal just spent less money to buy a computer that has more memory, is faster, and has a longer warranty. How bummed would you be? (We’re guessing plenty.) Now imagine you’ve just come back from 10 days in Tuscany, only to learn that a neighbor spent less for a full two weeks there at a nicer villa. This wouldn’t be pleasant to hear either, but it’s likely you’d get over it quickly. After all, you’ve still got your memories, your photos and your time with loved ones — experiences you’d be unwilling to trade for your neighbor’s trip.
This is where a primary concept in behavioral economics — the endowment effect — comes into play. The endowment effect says we’re likely to value something more highly simply because its ours. This is true of many things — including babies, which is probably why we evolved the bias — but it’s especially true with unique experiences. I may think my computer is better than yours because it’s mine, but I’ll almost certainly believe my sojourn in Italy was more ideally suited for me than yours, whatever its cost.
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Obviously, we’re not recommending you forgo creature comforts. Many material purchases are essential and/or provide immense satisfaction. But other research shows that people’s most common regrets about material goods are those of action — buying something that later seems unwise or impulsive. Their biggest regrets about experiential purchases tend to be regrets of inaction — not pouncing on an experience that was there for the taking.
This, by the way, is one post we hope will be read by policy-makers, philanthropists and other types who make decisions involving public money. It’s hard for people to have the kinds of experiences that do so much to promote well-being if there are no trails to hike or ride, and if local and national parks are run down or shuttered.
Material things grow familiar, become obsolete or break. Memories have very long warranties.