Guest post by Hazel Garcia from InvestmentZen
An oft-repeated quote is that money can’t buy happiness. But according to multiple studies, yes, it can. The key is what you spend that hard earned cash on. When researchers asked individuals to reflect on their recent purchases, those who had made experiential purchases i.e. trips, lessons, events, etc. were much happier compared to those who had made material purchases.
Why is this the case? According to a 20 year study at Cornell, our excitement from new purchases fades quickly over time. That new watch you bought quickly becomes a part of your everyday life. This is what psychologists call the “hedonic treadmill,” which describes the way we return to our normal state of happiness after a momentous occasion. However, buying a new chair will return you much quicker to that state than an adventure across the Rocky Mountains.
Researchers identified several key reasons why this is the case. One reason is that an object is just an object and can never become a part of your identity (at least, not a healthy one), 
whereas experiences shape us over time. In addition, because by definition unique experiences are only short-lived, we don’t adapt to them the way we might with a new phone or watch. They do not become part of the routine and as such are usually viewed in a special light.
Interestingly, researchers found that even a negative experience could be rated more highly than purchasing a luxury good. In the study, participants were asked to describe a bad experience they had recently and a few weeks later, they were asked again about it. Over the course of just a few weeks, most people’s opinion of that moment had changed.
This is because the human brain has a tendency to reduce the impact of stressful situations. In fact, a significant portion of those polled even stated that in the end, they were happy to have had the negative encounter as it gave them a fresh way to look at things. When similar questions were asked to those who had purchased a high-end item, their levels of happiness were consistently lower as time went on.
So when it comes to the age old question of “Does money buy happiness?” the answer is a resounding yes – provided you spend it on the right things. But of course, you should still aim to make every dollar go as far as possible in pursuit of great experiences. Take a look at the infographic below to see a visual summary of the research on money and how it can buy happiness.
Blog
References
Questions (by JS)
- Why does buying material goods not buy happiness? Does this apply to all material goods?
- What is different, in terms of happiness, about buying experiences? Does this apply to the consumption of all services?
- Is the consumption of experiences subject to diminishing marginal utility (a) for specific experiences; (b) for experiences in general? Explain.
- Why do we seem not to care as much about the “Jones'” vacation as about their income or possession of material goods?
The term ‘Google it’ is now part of everyday language. If there is ever something you don’t know, the quickest, easiest, most cost-effective and often the best way to find the answer is to go to Google. While there are many other search engines that provide similar functions and similar results, Google was revolutionary as a search engine and as a business model.
This article by Tim Harford, writing for BBC News, looks at the development of Google as a business and as a search engine. One of the reasons why Google is so effective for individuals and businesses is the speed with which information can be obtained. It is therefore used extensively to search key terms and this is one of the ways Google was able to raise advertising revenue. The business model developed to raise finance has therefore been a contributing factor to the decline in newspaper advertising revenue.
Google began the revolution in terms of search of engines and, while others do exist, Google is a classic example of a dominant firm and that raises certain problems. The article looks at many aspects of Google.
Just google it: The student project that changed the world BBC News, Tim Harford (27/03/17)
Questions
- Is Google a natural monopoly? What are the characteristics of a natural monopoly and how does this differ from a monopoly?
- Are there barriers to entry in the market in which Google operates?
- What are the key determinants of demand for Google from businesses and individuals?
- Why do companies want to advertise via Google? How might the reasons differ from advertising in newspapers?
- Why has there been a decline in advertising in newspapers? How do you think this has affected newspapers’ revenue and profits?
The UK Parliament’s Culture Media and Sport Select Committee has been examining the secondary ticketing market. The secondary market for events is dominated by four agencies – viagogo, eBay-owned StubHub and Ticket-master’s Get Me In! and Seatwave. These buy tickets to events in the primary market (i.e. from the events or their agents) and then resell them, normally at considerably inflated prices to people unable to get tickets in the primary market.
One example has grabbed the headlines recently. This is where viagogo was advertising tickets for an Ed Sheeran charity concert for £5000. The original tickets were sold for between £40 and £110, with the money going to the Teenage Cancer Trust. None of viagogo’s profits would go to the charity. The tickets were marked ‘not for resale’; so there was doubt that anyone buying a ticket from viagogo would even be able to get into the concert!
There are four major issues.
The first is that the tickets are often sold, as in the case of the Ed Sheeran concert, at many times their face value. We examined this issue back in September 2016 in the blog What the market will bear? Secondary markets and ticket touts).
The second is that the secondary sites use ‘bots’ to buy tickets in bulk when they first come on sale. This makes it much harder for customers to buy tickets on the primary site. Often all the tickets are sold within seconds of coming on sale.
The third is whether the tickets sold on the secondary market are legitimate. Some, like the Ed Sheeran tickets, are marked ‘not for resale’; some are paperless and yet the secondary ticket agencies are accused of selling paper versions, which are worthless.
The fourth is that multiple seats that are listed together are not always located together and so people attending with friends or partners may be forced to sit separately.
These are the issues that were addressed by the Culture Media and Sport committee at its meeting on 21 March. It was due to take evidence from various people, including viagogo, the agency which has come in for the most criticism. Viagogo, however, decided not to attend. This has drawn withering criticism from the press and on social media. One of the other witnesses at the meeting, Keith Kenny, sales and ticketing director for the West End musical Hamilton, described viagogo as ‘a blot on the landscape’. He said, ‘Ultimately, our terms and conditions say ticket reselling is forbidden. If you look at the way that glossy, sneaky site is constructed, they’ve gone an awful long way not to be compliant in the way they’ve built their site.’
The Competition and Markets Authority launched an enforcement investigation last December into suspected breaches of consumer protection law in the online secondary tickets market. This follows on from an earlier report for the government by an independent review chaired by Professor Waterson.
The government itself is considering amending the Digital Economy Bill to make it illegal to use bots to buy tickets in excess of the limit set by the event. Online touts who break this new law would face unlimited fines.
Articles
Touts to face unlimited fines for bulk-buying tickets online Independent, Roisin O’Connor (13/3/17)
Unlimited fines for bulk buying ticket touts BBC News (11/3/17)
Ticket touts face unlimited fines for using ‘bots’ to buy in bulk The Guardian, Rob Davies (10/3/17)
Ticket touts face unlimited fines in government crackdown on bots Music Week, James Hanley (11/3/17)
Government confirms bots ban and better enforcement in response to secondary ticketing review CMU, Chris Cooke (13/3/17)
The ‘Viagogo Glitch’: Why Fans Must Be Put First In The Secondary Ticketing Market Huffington Post, Sharon Hodgson (14/3/17)
Angry MPs accuse no-show Viagogo of ‘fraudulent mis-selling’ of Ed Sheeran tickets i News, Adam Sherwin (21/3/17)
Ed Sheeran’s manager Stuart Camp on secondary ticketing BBC News, Stuart Camp (21/3/17)
Fury at Viagogo no-show as MPs probe tickets on sale for thousands Coventry Telegraph, James Rodger (22/3/17)
Music fans given 10-step guide on how to tackle ticket touts Daily Record, Mark McGivern (20/3/17)
Viagogo snubs MPs’ inquiry into online ticket reselling The Guardian, Rob Davies (21/3/17)
Viagogo a No-Show at U.K. Hearing Into Secondary Ticketing: ‘Huge Lack of Respect’ Billboard, Richard Smirke (21/3/17)
Daily Record campaign against ticket touts reaches Parliament but Viagogo don’t show up to answer claims Daily Record, Torcuil Crichton and Keith McLeod (22/3/17)
Ticketmaster is using its software — and your data — to take on ticket-buying bots recode, Peter Kafka (14/3/17)
Official sites and documents
The Culture, Media and Sport Committee holds a further evidence session on ticket abuse. Culture, Media and Sport Commons Select Committee (20/3/17)
CMA launches enforcement investigation into online secondary ticketing Competition and Markets Authority, Press Release (19/12/16)
Independent Review of Consumer Protection Measures concerning Online Secondary Ticketing Facilities Department for Business, Innovation and Skills, Professor Michael Waterson (May 2016)
Ticket abuse: ban digital ‘harvesting’ software says Committee Culture, Media and Sport Commons Select Committee (24/11/16)
Questions
- Use a demand and supply diagram to demonstrate how secondary ticket agencies are able to sell tickets for popular events at prices several times the tickets’ face value.
- If secondary ticket sites and ticket touts are able to sell tickets at well above box office prices, isn’t this simply a reflection of people’s willingness to pay (i.e. their marginal utility)? In which case, aren’t these sellers providing a useful service?
- How do secondary ticket agencies reduce consumer surplus? Could they reduce it to zero?
- See Tickets, the primary market ticket agency, has set up a secondary site, whereby fans can trade tickets with one another at a mark-up capped at just 5%. Will this help to reduce abuses on the secondary market, or is it a totally separate part of the market?
- Would it be a good idea for event organisers to charge higher prices for popular events than they do at present, but still below the equilibrium?
- How does the price elasticity of demand influence the mark-up that secondary ticket agencies can make? Illustrate this on a diagram similar to the one in question 1.
- What measures would you advocate to make tickets more available to the public at reasonable prices? Explain their benefits and any drawbacks.
- What would be the effect on prices if the use of bots could be successfully banned?
Both the financial and goods markets are heavily influenced by sentiment. And such sentiment tends to be self-reinforcing. If consumers and investors are pessimistic, they will not spend and not invest. The economy declines and this further worsens sentiment and further discourages consumption and investment. Banks become less willing to lend and stock markets fall. The falling stock markets discourage people from buying shares and so share prices fall further. The despondency becomes irrational and greatly exaggerates economic fundamentals.
This same irrationality applies in a boom. Here it becomes irrational exuberance. A boom encourages confidence and stimulates consumer spending and investment. This further stimulates the boom via the multiplier and accelerator and further inspires confidence. Banks are more willing to lend, which further feeds the expansion. Stock markets soar and destabilising speculation further pushes up share prices. There is a stock market bubble.
But bubbles burst. The question is whether the current global stock market boom, with share prices reaching record levels, represents a bubble. One indicator is the price/earnings (PE) ratio of shares. This is the ratio of share prices to earnings per share. Currently the ratio for the US index, S&P 500, is just over 26. This compares with a mean over the past 147 years of 15.64. The current ratio is the third highest after the peaks of the early 2000s and 2008/9.
An alternative measure of the PE ratio is the Shiller PE ratio (see also). This is named after Robert Shiller, who wrote the book Irrational Exuberance. Unlike conventional PE ratios, which only look at average earnings over the past four quarters, the Shiller PE ratio uses average earnings over the past 10 years. “Because this factors in earnings from the previous ten years, it is less prone to wild swings in any one year.”
The current level of the Shiller PE ratio is 29.14, the third highest on record, this time after the period running up to the Wall Street crash of 1929 and the dot-com bubble of the late 1990s. The mean Shiller PE ratio over the past 147 years is 16.72.
So are we in a period of irrational exuberance? And are stock markets experiencing a bubble that sooner or later will burst? The following articles explore these questions.
Articles
2 Clear Instances of Irrational Exuberance Seeking Alpha, Jeffrey Himelson (12/2/17)
Promised land of Trumpflation-inspired global stimulus has been slow off the mark South China Morning Post, David Brown (20/2/17)
A stock market crash is a way off, but this boom will turn to bust The Guardian, Larry Elliott (16/2/17)
The “boring” bubble is close to bursting – the Unilever bid proves it MoneyWeek, John Stepek (20/2/17)
Questions
- Find out what is meant by Minksy’s ‘financial instability hypothesis’ and a ‘Minsky moment’. How might they explain irrational exuberance and the sudden turning point from a boom to a bust?
- Is it really irrational to buy shares with a very high PE ratio if everyone else is doing so?
- Why are people currently exuberant?
- What might cause the current exuberance to end?
- How does irrational exuberance affect the size of the multiplier?
- How might the behaviour of banks and other financial institutions contribute towards a boom fuelled by irrational exuberance?
- Compare the usefulness of a standard PE ratio with the Shiller PE ratio.
- Other than high PE ratios, what else might suggest that stock markets are overvalued?
- Why might a company’s PE ratio differ from its price/dividends ratio (see)? Which is a better measure of whether or not a share is overvalued?
Many or us make New Year’s resolutions: going on a diet, doing exercise, spending more time studying. But few people stick to them, even though they say they would like to. So how can people be motivated to keep to their resolutions? Well, the experiments of behavioural economists provide a number of insights into the problem. They also suggest various incentives that can be used to motivate people to stick to their plans.
Central to the problem is that people have ‘time inconsistency’. They put a higher weight on the benefits of things that are good for them in the future and less weight on these benefits when they have to act now. You might strongly believe that going to the gym is good for you and plan to go next Monday. But when Monday comes, you can’t face it.
Another part of the time inconsistency problem is the relatively high weighting given to short-term gratification – eating chocolates, watching TV, spending time on social media, staying in bed. 
When thinking about whether you would like to do these things in, say, a couple of days’ time, you put a low weight on the pleasures. But thinking about doing them right now, you put a much higher weight on them. As the well-known saying goes, ‘Hard work often pays off after time, but laziness pays off now’.
So how can people be motivated to stick to their resolutions? Behavioural economists have studied various systems of incentives to see what works. Some of the findings are as follows:
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People are generally loss averse. To get us to stick to New Year’s resolutions, we could devise a system of penalties for breaking them, such as paying 20p each time you swear! |
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Given people’s time inconsistency, devising a system whereby you get treats after doing something you feel is good for you: e.g. watching TV for 30 minutes after you’ve done an hour’s revision. Rewards should follow effort, not precede them. |
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Having simple clear goals. Thus rather than merely saying ‘I’ll eat less’, you devise a meal plan with menus that meet calorie and other dietary goals. Rather than saying, ‘I’ll exercise more’, you commit to going to the gym at specific times each week and doing a specific amount of each exercise. |
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Ritualising. This is where you devise a regime that is feasible to stick to. For example, you could always write a shopping list to meet your dietary goals and then only buy what’s on that list; or you and your flatmates could have a rota for household chores. |
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Social reinforcement. This is where people have a joint plan and help each other stick to it, such as going to the gym at specific times with a friend or group of friends, or joining a support group (e.g. to lose weight, or give up drinking or smoking). |
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Avoiding temptation. For example, if you want to give up chocolate, don’t have any in the house. |
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Using praise rather than criticism. People generally respond better to positive incentives than negative ones. |
Behavioural economists test these different incentive mechanisms to see what works best and then to see how they can be refined. The testing could be done experimentally, with volunteers being given different incentives and seeing how they respond. Alternatively, data could be collected on the effects of different incentive mechanisms that people have actually used, whether at home or at work.
The advertising and marketing industry analyses consumer trends and how people respond to pricing, quality, display, packaging, advertising, etc. They want to understand human behaviour so that they can ‘direct’ it in their favour of their clients. Governments too are keen to find ways of encouraging people to do more of things that are good for them and less of things that are bad.
The UK government’s Behavioural Insights Team looks at ways people can be ‘nudged’ into changing their behaviour, see the blog A nudge in the right direction?
But back to New Year’s resolutions, have you made any? And, if so, have you thought about how you might stick to them? Have you thought about the incentives?
Podcast
Dan Ariely talks “Payoff” WUNC 91.5: North Carolina Public Radio, Dan Ariely talks to Frank Stasio (3/1/17)
Articles and blogs
50 New Year’s Resolution Ideas and how to Achieve Each of Them Lifehack, Ivan Dimitrijevic (31/12/16)
5 New Year’s Resolutions You Can Keep (With The Help Of Behavioral Science Research) Forbes, Carmen Nobel (3/1/17)
The science behind keeping your New Year’s resolutions BT, SNAP PA (30/12/15)
The Guardian view on New Year resolutions: fitter, happier, more productive The Guardian, Editorial (3/1/17)
The Behavioral Economics of Your New Year’s Resolutions The Daily Beast, Uri Gneezy (5/1/14)
The psychology of New Year’s resolution The Conversation, Mark Griffiths (1/1/16)
Apply Behavioral Economics for a Better New Year Wharton Blog Network, William Hartje (16/1/14)
The Kardashians Can Help Your New Year’s Resolutions Huffington Post, John Beeby (29/12/16)
Using economics to score with New Year resolutions The Hindu, Venky Vembu (4/1/17)
Be It Resolved The New York Times, John Tierney (5/1/12)
Goal-setting site
stickK ‘Set your goals and achieve them!’
Questions
- Explain what is meant by time inconsistent behaviour. Is this the same as giving future costs and benefits a lower weighting than present ones (and hence having to discount future costs and benefits)?
- Give some examples of ways in which your own behaviour exhibits time inconsistency. Would it be accurate to describe this as ‘present bias’?
- Would you describe not sticking to New Year’s resolutions as ‘irrational behaviour’?
- Have you made any New Year’s resolutions, or do you have any plans to achieve goals? Could you alter your own personal incentives and, if so, how, to make it more likely that you will stick to your resolutions/goals?
- Give some examples of ways in which the government could ‘nudge’ us to behave in ways that were more in our own individual interests or those of society or the environment?
- Do you think it’s desirable that the advertising industry should employ psychologists and behavioural economists to help it achieve its goals?
An oft-repeated quote is that money can’t buy happiness. But according to multiple studies, yes, it can. The key is what you spend that hard earned cash on. When researchers asked individuals to reflect on their recent purchases, those who had made experiential purchases i.e. trips, lessons, events, etc. were much happier compared to those who had made material purchases.
