By Andrew Blackman
Conventional wisdom says you should be investing as much of your excess money as you possibly can. That may be the best path to greater wealth. But it may not be the best path to happiness.
In a previous article we looked at a broad range of research about money and happiness. Some of the main conclusions: Experiences tend to provide more lasting happiness than material goods; giving money away makes people happier than spending it on themselves; and wealthier people do tend to be happier, but only up to a certain point.
More recent research has yielded surprising new insights. One study, for example, shows that when it comes to happiness, a bank balance may be more important than overall wealth. Meanwhile, a separate study suggests that buying material things can make you happier—but only if the things you buy fit your personality.
The Wall Street Journal spoke recently with Joe Gladstone, research associate at the University of Cambridge in the U.K. and co-author of both studies. Here are edited excerpts from that interview.
The right balance
WSJ: Why did you decide to look at the link between bank balances and happiness?
MR. GLADSTONE: I’ve been working with banks to answer some interesting questions about how and why people make certain financial decisions. A U.K. bank allowed us to survey thousands of its customers about their happiness and then match those responses to transaction data from their accounts.
We wanted to look at the fundamental question: To what extent can money lead to happiness? And does money tied up in a nonliquid form provide the same happiness as money that is available to spend?
WSJ: And what did you find?
MR. GLADSTONE: We find a very interesting effect: that the amount of money you have in your bank account right now is a better predictor of happiness than your aggregate wealth. Having more money in their bank account makes people feel more financially secure, which leads to an increase in happiness.
That makes sense for the poorest 50% in the study, but it’s surprising that it’s still the case for the richest 50%. Even for a very wealthy person who has lots of savings and investments, having more money in their checking account seems to increase their happiness.
It is just a correlational study, so we don’t study the reasons for this. But we can hypothesize that when money is tied up in a pension or investments, it feels more abstract and inaccessible. Going to the ATM and seeing a large balance available feels more important to people.
WSJ: Why is this research important?
MR. GLADSTONE: It goes against the traditional advice a financial adviser might give someone. Advisers might say all money that isn’t invested in something like equities is wasted—it’s sitting in your account losing value—so the right choice from a purely rational economic point of view is to invest it.
But that is not taking into account human psychology. It isn’t just about maximizing your monetary benefit, but about maximizing your well-being.
WSJ: Should people keep all their money in their checking account?
MR. GLADSTONE: No, there are diminishing returns. Going from £1 to £1,000 (about $1.30 to $1,300) leads to more happiness than going from £1,000 to £10,000, and so on. But people might want to think about building up more current assets.
So many people are living as financial zombies, going from paycheck to paycheck. Yet often they do have some assets. Maybe they own a house or have access to some other asset. If they shifted their approach and built up more of a buffer to make themselves feel more secure, it might be a powerful way to make them feel happier with their lives.
WSJ: Your other research looks at buying decisions and happiness. What do you find in that study?
MR. GLADSTONE: Lots of research out there assumes that a single rule will tell all of us what will make us happy. But people are different, so we wanted to take the research to the next level and look at how different kinds of people can maximize their happiness.
So again we partnered with a major bank in the U.K. We looked at people’s debit-card transactions and matched them against the results of personality and happiness surveys. We found that when people spent money on things that matched their personality, it was strongly predictive of happiness.
WSJ: Isn’t this an obvious link? Doesn’t everyone spend on things that fit their personality?
MR. GLADSTONE: No. If you ask people what would make them happier, they often give a normative response; in other words, what should make them happy. But what we show is that what fits with socially desirable behavior may not be what makes you happy.
Often, our behavior is driven by what other people are doing. People are not always good at listening to who they are as individuals and behaving in ways that respond to those individual traits.
The next stage of this research will be to look at why some people are better at this than others.
WSJ: How do you measure the link between personality and spending?
MR. GLADSTONE: We use something called the “big five,” which is the five characteristics that make most people different from each other. The simple acronym for this is OCEAN: openness, conscientiousness, extroversion, agreeableness and neuroticism.
We assessed people’s personalities based on that model. But then we had to assign personality scores to the products and things they spent their money on. We did that with a large-scale online survey in which we asked people to rate how well each type of spending matched the different personality types.
But this analysis, like the previous study, only showed a correlation. We also wanted to show a causal link, so we did a separate experiment in which we took people who were highly introverted or highly extroverted and gave them money to spend either in a bar or in a bookshop. Then we asked them for their levels of happiness at multiple points in the process.
We show that when the extroverted people spent money in the bookshop, it had no effect on their happiness, whereas the introverts became happier. And in the bar, the introverts actually became less happy. It is a small-scale study, but it’s quite compelling evidence for a causal link between how well our spending behavior matches our personality and how happy we are.
WSJ: How can people put these results into practice?
MR. GLADSTONE: There are lots of Big Five personality tests freely available online, so you could get to know yourself better and use it to think about your spending. We need to do more research in this area, but our paper provides a starting-point for thinking about this.
Of course, everyone has some constraints on their spending. People have to pay the rent, and we’re not saying that they shouldn’t do things like that because it doesn’t fit their personality. But with the chunk of your money that is discretionary, maybe that can be optimized in a way that reflects who you are as a person and makes you happier as a result.