This Insight was originally posted in December 2014. We are re-posting it this week as we feel its message is particularly relevant as we enter the highly commercialized holiday season...
“We spend money that we do not have, on things we do not need, to impress people who do not care.” - Will Smith
Why do we all have such an innate desire to spend money? For many people, it is as if money literally burns a hole in their pocket as it is spent faster than it can be accumulated. Our interest in this topic was sparked after we stumbled across a video on Yahoo’s personal finance page, which tells the sad story of how NBA star Antoine Walker rose to fame and fortune only to see it all disappear after making a number of poor decisions with his spending and investments. Even though Walker grossed over $110 million in salary from playing in the NBA, he had to declare bankruptcy in 2010 citing $12.74 million in debt versus $4.28 million in assets. Although the poor investments from the housing crisis were the straw that broke the camel’s back for Walker, the fact that he only had $4.28 million in assets after earning over a hundred million in income from salary and endorsements, shows that his lifestyle choices and spending habits were the main culprit behind his financial fallout.
In the video, Antoine states that one of the main reasons he had a such a strong desire to spend money and acquire things came from, “not having a lot of things growing up, not having some of the finer things in life, and always dreaming and wishing and hoping to live in a bigger house; to have materialistic things that I never had.” This sentiment is not uncommon and can explain why the majority of lottery winners end up suffering a similar fate. The desire to spend money and acquire things comes from an innate desire to boost our self-esteem. We get a purchase high from spending money on things with the belief that each purchase will somehow improve our relationships with others, help us feel better about ourselves, or ultimately lead to a more pleasurable life. Oddly enough, this is typically not the case as the purchase high tends to be relatively short lived, and often times the pleasure derived from the anticipation of the purchase can outweigh the purchase itself.
The desire/need to boost our self-esteem has only been magnified in recent years with the explosion of social media and our interconnected lives. It is easy to feel a sense of inadequacy and jealousy when we are surrounded by images and snippets of people putting their best foot forward for everyone to see. Any attempt to keep up with the Joneses is a losing proposition because it involves chasing after a constantly moving target that will never be attained. Additionally, it has never been easier to chase after this unattainable goal due to the proliferation of easy credit and debt in our society.
Michael Norton, professor at Harvard Business School and author of Happy Money: The Science of Smarter Spending, conducted a study in which he asked a large number of high net worth ($1M+) individuals how much money they would need to have in order to be happy. What he found was that no matter how much money someone had, they always thought happiness could be achieved if they could triple their net worth.
No matter how much money you have, you think three times as much is the right amount. It just shows that we never learn. We always keep thinking that it’s the next level that is going to make us happy. It’s disturbing because if you look at the data, with two to three times as much money, you’re not that much happier. – Michael Norton
The logical conclusion to Professor Norton’s study is that money can’t buy happiness, but he discovered quite the opposite in a separate study he conducted and spoke about in the embedded Ted Talk. What Professor Norton found was that money can indeed buy happiness when it is spent correctly. What is the correct way to spend money you might ask? Well, if your goal in spending the money is to provide happiness to yourself, then the correct way is to spend money on other people rather than oneself. In the video, Professor Norton references a Gallup poll which showed a high degree of correlation between people that had recently donated money and their general level of happiness.
It is not bad to want to improve one’s self esteem. It is also not bad to pursue things in life that bring us happiness. The problem is we are going about this entirely the wrong way. The opening quote from Will Smith summarizes this issue beautifully, “We spend money that we do not have, on things we do not need, to impress people who do not care.” There is no end to the goal of trying to elevate ourselves above our peers by acquiring material goods or reaching some level of prosperity that is X times larger than our current state. Neither of these pursuits provides true happiness. So the next time you find your money burning a hole in your pocket, try spending it on someone else rather than yourself and see if it produces a richer level of happiness than the purchase high we are so prone to chase.
Author Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.
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