The study of happiness has come a long way in recent years, thanks to the development of behavioural finance and the entry of economists into the field, which was formerly the bailiwick of psychologists, sociologists and psychiatrists.
Like all matters to do with the mind, it seems, happiness is a very complex thing. Neuroscience – including its permutations in psychiatry – is helping to explain how the brain actually works, to the extent that we now know that a good proportion of our inclination to be happy rather than sad is actually genetic.
So, off the back of all this new knowledge and numerous erstwhile academic studies, what are we to make of the recent white paper from the Association of Financial Advisers which found that people with financial advisers are “happier, richer and more purposeful”?
The easy answer is to say ‘not much’ but the survey on which the paper is based should not be condemned outright. Even though the results are pretty much meaningless, any endeavour by the financial advice industry to try to understand clients a little better is worthwhile.
The AFA paper was based on a survey in May this year of 1,054 consumer respondents to a (much larger) sample by the research firm CoreData. But here are the two main problems with survey-based studies about cognitive functions and behaviours:
- they are subject to big distortions in the reporting of the information, and
- they tend to be either incorrectly presented or presented in a manner which is easily misinterpreted.
Many studies have shown, for instance, that if you ask people what makes them happy, they will most often say their children, holidays and spouses, in varying orders. Interestingly, spouses normally rank higher on the list for men than women.
However, in studies which have involved tracking the respondents’ moods more closely, by getting them to wear a beeper which sounds several times and day and after which they immediately record what they are doing and how happy they feel, the results are quite different. In these studies the most likely things to make people happy are reading and watching movies, which are activities where the respondents are more enmeshed in other people’s lives than their own. Children, holidays and, dare I say it, spouses, are actually stressful.
The other problem, which is probably a bigger one, is that surveys report correlations between factors which may or may not be causal. Are people who are happier than average more likely to seek out financial advice or do financial advisers make people feel happier? Instinctively, you’d probably think it’s a bit of both.
In the book ‘The Happy Economist – Happiness for the Hard-Headed’ by Ross Gittins, the economics editor of the ‘Sydney Morning Herald’, the results of numerous studies are sourced showing that money does indeed make people happier. But only up to a point. Once a certain threshold is reached, the marginal utility from each additional dollar diminishes quickly. After that point any extra degree of happiness is most likely to be gained from one’s relative wealth compared with neighbours and peers rather than absolute wealth.
So, if you get a big pay rise and decide to buy a long-wanted Porsche, your level of happiness will jump for a time. Then, two factors intercede. One is called ‘adaption’, whereby you get used to the new expensive toy and discover that it is not all you hoped it would be. You have to be more careful where you park, for one thing, and then there’s the cost of maintenance. The other is to do with relativities. If your neighbour buys a Porsche shortly after you do, your level of extra happiness will drop like a stone.
For the record, the best predictors of happiness are good old-fashioned values. Married people and people who go to church regularly tend to be happier than others. Childless couples tend to be happier than those with children, which might grate with some people but is evidently true. And people who live in one place for longer and therefore develop a greater sense of community will likely be happier.
With respect to the AFA paper, it is not surprising that people who see a financial adviser tend to be happier, richer and more purposeful. Hopefully, though, financial advisers are not claiming the credit for their clients’ fortunate states of mind. They can help a bit, but not much more.
