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Why money doesn't necessarily bring happiness

Increases in wealth can lead to unrealistic expectations of contentment, which, when subsequently unfulfilled, cause disappointment


You might think that a column about finances in the new year would include tips about adding some razzle-dazzle to your portfolio or a few sage words on real estate.

That all seems a little 2005. What if you asked yourself instead: What is the relationship between my finances and my happiness, anyway?

As some of you may have heard, money does not have a very strong relationship to happiness. Indeed, it is unclear whether the two parties are even well acquainted. Yet, according to the renowned British economist Richard Layard, author of Happiness: Lessons From a New Science, humans cling to the notion that the two are linked -- with a result, Layard said in an interview, that "people tend to expect more from money than it can give."

That's not to say being broke is better.

A quotation in Layard's book is credited to Woody Allen: "Money is better than poverty, if only for financial reasons." Amen to that. At the same time, Layard points out that the research on this topic suggests that we would all be a lot happier if we understood the true effect of money on our psyches.

You or I may wish for a more prosperous new year, a big raise, a fat bonus, the wherewithal to buy a bigger home, a nicer car and so forth, but Layard says that "many studies show that people have an exaggerated forecast of the benefits of having that higher income or bigger house."

As soon as your material position improves, researchers have found, there is a remarkable tendency to adapt. The thrill is gone, as they say. "When we monitor how people are affected by the house or car, it's not anything like they expected," Layard said. "Your happiness does go up for a while, then it returns to the base level."

If you think that sounds like a recipe for that chronic not-quite-satisfied feeling, then you would be right. People tend to crave more money and more things to restore that peak of good feeling -- only to adapt to those pleasures and seek the next high -- an addictive phenomenon that economists have labelled the hedonic treadmill.

"Some people might say, isn't that the way all life is? But the answer is no," Layard said. "If you have good friendships, you don't feel the need to have more and more friends. If you have a good marriage, you don't need more and more marriages to stay satisfied."

So the quest for a financially fulfilling new year -- at least in conventional terms -- might not add to your store of joy. There is something about the pursuit of money itself that seems to put happiness just out of reach. In fact, studies have shown that whatever people earn, they tend to estimate that the real amount they need to live is still higher. We tend to compare our financial status with that of those around us, and if ours is lower, suddenly whatever we have is no longer enough.

Layard posits that there may be an evolutionary mechanism "that drives people to ever higher goals," but he questions the usefulness of this onward-upward urge in modern times, when outright survival does not depend so much on acquisitive Type A behavior. "I think it's a relatively new situation for human beings to be in," he said. "How can we raise our quality of life, when increasing our material possessions is no longer the most important factor in raising quality of life?"

I love that question. It is not to say that acquiring the iPod, Mini Cooper or inground pool that you have always wanted will not enhance your lifestyle. But what Layard and many other researchers are finding is that it pays to think like a shrewd investor and realize that most material investments have a greater yield in the short term. For more steady dividends, emotionally and financially, you may want to rebalance your portfolio to include stocks that often outperform expectations.

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