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Money Matters

Jonathan Clements  |  March 30, 2019

WE MAKE countless decisions—financial and otherwise—with little or no thought to the dollars at stake:

  • We purchase items that we know are overpriced and almost guaranteed to lose value, but we do so happily, because they have a meaning for us that’s far greater than their price tag. Think of artwork and vacation souvenirs that are purchased because they remind us of moments we treasure.
  • We prize family possessions for their sentimental value, even though they typically have scant financial worth. Indeed, after a family member dies, often the biggest squabbles are over possessions with no resale value.
  • We spend endless dollars on our family, while rarely—if ever—asking whether we’re wasting money.

None of this is especially surprising or, I’d argue, irrational. We’re talking about the pursuit of happiness—and that involves making choices where we receive greater value than the dollars we’re forking over.

Instead, what’s surprising is this: When that emotional resonance isn’t there, we typically default to money as the yardstick for measuring someone or some thing’s worth. We assume successful entrepreneurs and Hollywood stars must—in some sense—be special, simply because they have or earn a lot of money. We assume items are desirable, simply because they come with a large price tag. These are, to borrow from a recent piece by HumbleDollar contributor Jim Wasserman, Veblen goods.

It’s hard to shake this way of thinking, even though it runs contrary to what we experience every day. We don’t think our older daughter is superior to our younger son, just because she earns more money. We don’t have the urge to throw out every household possession that would command little or nothing on eBay. When we think about the people and things in our lives, we think in absolute terms. If we care about them, we care about them—period—and not on a scale of one to 10.

But when we turn to the larger world—the world we don’t know personally—the 10-point scale comes into play. Our thinking goes from absolute to relative. We measure everything in dollars—and we assume the more, the merrier. What if we have less than others? We’ll often feel less happy.

This is the warped thinking that drives the Easterlin paradox, named after economist Richard Easterlin. At any point in time, those in society with higher incomes tend to say they’re happier. What if incomes rise, so the rest of us start enjoying the standard of living previously enjoyed only by the wealthy? Society grows no happier, because there are always those who feel relatively shortchanged.

This was confirmed yet again by the latest General Social Survey. In 2018, 31% of Americans said they were very happy, barely higher than the 30% who described themselves that way in 1972, when the General Social Survey was first conducted. Yet, over this 46-year stretch, U.S. inflation-adjusted per-capita disposable income rose 131%. We’re living more than twice as well as we were in 1972, but apparently we’re no happier.

How can we overcome this financial relativism—and feel more content with what we have? While anecdotal evidence is usually the scourge of rational financial thinking, this is one occasion when it may actually help. By pondering the people and possessions in our own lives, we may realize that the connection between money and happiness is awfully tenuous—and those we perceive as being more fortunate may be no happier.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include 45 Steps to SuccessGot to Believe and Labor of Love. Jonathan’s latest book: From Here to Financial Happiness.

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