Professor Paul Dolan, a renowned global expert in behavioural science and happiness, is the head of Behavioural Sciences at the London School of Economics. He explores how science can help us to get the most happiness from our investments and not just the most money.
What is happiness?
Happiness is located in our experiences - what we do, who we do them with and what we pay attention to. Within experiences are the two main components of happiness – pleasure and purpose. Alongside the experiences of things that bring you joy and contentment are experiences of purpose, the things that are worthwhile and meaningful when you’re engaged in an activity. Happy lives are those that contain a balance between fun (pleasure) and fulfilment (purpose).
You can produce more happiness by using your inputs (the amount of money, friends or resources you have) to produce the output of happiness. A lot of behavioural sciences insights are very obvious, but are overlooked. A very obvious insight is that we are what we pay attention to. If you want to be happy, pay attention to what makes you feel good.
When we look at the effects of income on happiness, measured by experiences, there are some interesting correlations. Firstly, there are diminishing returns to income – being poor makes people miserable. When you’re poor, you’re paying attention to the fact that you can’t pay bills, rent, etc. It’s not surprising that poverty makes people miserable psychologically as well. When you get richer, you pay less attention to it as you don’t need to worry about money as much. However, the happiness hit of income starts to wear off and may actually start to fall again when people get richer and start paying more attention to money again in terms of investments, assets, portfolio management, etc. and whether you are using it wisely. There is a potential sweet spot when you’ve got just enough money, but not too much.
Happiness is determined by what we pay attention to
Attention is not allocated consciously and deliberately. Behavioural science indicates that most of our attention is allocated unconsciously through what is drawn to our minds through stimuli and our environment. Our system 1 brain is very fast, effortless, automatic and unconscious and drives most of what we do. This contrasts with the system 2 brain, which is the more deliberate and conscious. Our system 1 brain makes associations in the environment to make life easier for you. Your system 2 brain validates the decision made by system 1.
We see many examples where people are activated by mental triggers in ways that they’re not consciously aware of. If you’re thinking of designing interventions to make yourself or other people happier or wanting people to buy your financial products, it’s more effective to design environments that make it easier for people to behave in a certain way than to change their minds about those environments.
But, we can also fool ourselves when we know we’re fooling ourselves. Placebo effects work even when we know we’re taking placebos. Designing environments is critical to changing behaviour. Think about ways in which you can organise your day to make it easier to do things that will make you happier and harder to do things that won’t.
Happiness is affected by the stories we tell
Much of what we do is driven by the narratives we tell about ourselves and our lives. There are lots of narratives around our behaviour and what we should be spending our money on or not. These are sometimes constructed by us, but a lot of the time for us. We live our lives in the conversations that we have with ourselves and other people about our behaviour and wellbeing.
There is evidence that suggests that spending money on experiences makes you happier than spending money on material consumption. The reason is that you can talk about your experience far more than you can about a new pair of shoes. Happiness is a flow of experiences of pleasure and purpose over time. Some of those experiences won’t be when you’re paying attention directly to the moment that you’re in, but when you’re paying attention to memories or things that have already been experienced and anticipations of things yet to happen. When we think about spending our resources using our time and money, not only are we going to be thinking of money in the experience, but money in the memory and anticipation. The anticipation of future benefits is fundamentally important to our wellbeing and is why people often book holidays far in advance.
Social narratives can affect how we live and our happiness
Social stories can drive our addiction to success and social status, irrespective of how much you have in the first place. Some of these effects can be very pervasive and can operate in unconscious ways. We often reference ourselves against how other people are doing and get sucked into comparison processes. The main lesson is acceptance of these narratives and how powerful some of these social stories can be. It can be difficult to get off that treadmill.
Benefitting from altruism should be celebrated
We have this narrative of pro-sociality that it should be cleansed of any self-interest or benefit, which is harmful for society. We would get more pro-sociality if we celebrated the selfishness of our altruism. The evidence is overwhelmingly clear that when you draw attention to the personal benefits that come from helping other people, you get more of it. There’s nothing wrong with people who do good feeling happier. You will be happier if you use your assets, wealth and time in ways that help other people - they benefit as do you.
We need to make sure that money serves people and not the other way round. By having an understanding of the role of attention and where happiness comes from, we can crystallize investment goals more specifically. Goals should not be just a number and a timeframe, but a specific way of investing our intentions. Think about your investment goals in a way that allows you to get the most happiness out of them.