Tuesday, March 5, 2013

Buy Stuff And Be Happy

As I've worked on this blog and dug deeper into how people make financial decisions, it's becoming increasingly clear that we really have no idea what the impacts of our financial decisions are. I just ran into a shining example of this a few nights ago as I read about some new research that suggests shopping can make a person less sad. This conclusion runs in direct conflict with many books I've read or discussion I've participated in about the concept of "retail therapy" - shopping to alleviate some emotion.

The Benefits of Retail Therapy

In their paper The Benefits of Retail Therapy: Choosing To Buy Reduces Residual Sadness; Scott Rick, Beatriz Pereira and Katherine Alicia Burson explore what the emotional impact of buying something is on sadness. As they identify, saddened emotional states can lead people to do shopping they may not have done otherwise. Generally, this has been characterized as a negative process, since people spend money they didn't necessarily plan to spend. The researchers, however, set out to determine if this shopping process is actually beneficial from a non-economic perspective.

Across three separate experiments, their results supported their hypothesis: the act of making buying decisions does decrease sadness. What's interesting is that through their experiments, they identify that it's not the acquisition of new products that decreases sadness. They suggest the mechanism that decreases sadness is the actual process of choosing to buy something. This process acts as a way of regaining some control of one's life and a renewed sense of control can lead to less sadness.

Some Caveats

The researchers identify several limitations to their study. The impact on sadness, while viewed across all three experiments, was relatively mild. The "shopping environment" they set up for the experiments didn't perfectly model real-world shopping experiences. The researchers also reveal that there may be other mechanisms at work in addition to the "regaining control" mechanism, which need to be identified and studied.

I'll add some further caveats. The experiments were very small with only a few hundred participants total. Further, this is a single piece of research which needs to be reevaluated by other parties to determine if they can replicate this impact. Additionally, they measured the short-term effect of shopping on sadness without any view on long-term impact.

But the results remain highly interesting to me for two reasons: 1) they run counter to conventional wisdom and, 2) they speak to a non-economic impact of financial decisions.

Why We Know So Little

We really don't have any idea what the impact of financial decisions are. The financial planning profession and society have for so long focused solely on the economic impact of financial decisions, that we've totally missed all the other impact each financial decision has. This research is a perfect example. While as a profession we're ready and willing to admonish people for participating in "retail therapy" because it has an economic cost, we never bothered to figure out if it actually helps those people emotionally and physically!

If the non-economic benefits are great enough, the economic costs may be worthwhile. I'm not suggesting this is the case with retail therapy, but I am suggesting that we begin to try to understand these overall impacts of financial decisions much better. Until we do so, we're really failing at helping people make good financial decisions. Economics play only a small part in the financial decision making equation.