A study in the Journal of Consumer Psychology (PDF) looked into the age-old question, "Can money buy happiness?" Their answer was a resounding yes. In fact, they concluded that "If money doesn't make you happy, then you probably aren't spending it right."
Their assertion is that the vast majority of us are making incorrect predictions about how money will make us happy, so we spend it in ways that we think will make us happy, but they don't. However, if we follow certain principles of spending, money indeed will make us very happy. (See also: Does Money Really Buy Happiness?)
Researchers found that people reported greater happiness when reflecting on an experience purchase rather than a material purchase. The reason is because we adapt to things very quickly. Buying a new and shiny toy brings us some happiness at the moment, but after a day or two, it becomes an everyday item that we use. In contrast, an experience takes us out of our everyday and leaves a lasting impression. Imagine a safari adventure or surfing in Hawaii for the first time. You will remember it more fondly when looking back than you would a purchase of a thing, no matter how shiny it was.
We are profoundly social, and the quality of our relationships is a strong indicator of our happiness. People who spent more in "prosocial spending" (gifts for others or charity donations) were happier, even after controlling for income levels. Subjects felt happier when they reflected on a time when they had spent money on others versus a time they had spent on themselves. Using MRI scans, researchers showed that giving money away (even when being forced to do so) led to activation in brain areas associated with receiving rewards.
We adapt so well to the stuff we buy that making even a big material purchase does not have long-lasting effects. But that also means that the difference in happiness between a big purchase and a small one is minimal, and we could have multiple pleasures at the cost of one. We don't need a lot of money to buy the one big thing when we can afford smaller, more frequent mini-things. The amount of money spent on the purchase affects us less than just the enjoyment of having something new.
The researchers are coming from the point of view that consumers buy warranties as a safeguard again emotional loss. People tend to predict that they won't cope very well in a bad event (even though they're wrong — we're more resilient than we think). "The prospect of loss is highly aversive to people, who expect the pain of losing $5 to exceed the pleasure of gaining $5. This is not true." Even though the warranties offered by retailers and manufacturers are generally known to be bad deals for consumers, they're still purchased by people who believe that the warranties will make them happier if something does happen to their items, and they're able to avoid the loss. In reality, even if something does happen, it really doesn't make the person happier or less sad than if she didn't have the warranty at all.
People generally feel happiness when they anticipate an event. The person who buys a cupcake and eats it right away experiences less joy than the person who takes it home with anticipation to eat the cupcake at a later time. The difference is the extra happiness she gets during the ride home. Even though we are so used to instant gratification and desire it, we still very much enjoy looking forward to something in the future. We think it'll make us happier to get the satisfaction right now, but in reality we're perfectly happy while eagerly awaiting something.
Many people have big dreams, like buying a McMansion or a boat so they can sail off for months at a time. We imagine having a cottage in the woods where we can get away every weekend or retiring at 35. When we daydream about fulfilling these goals, we see a big — but fuzzy — picture. We forget that a very large house requires more time to keep clean or that we get seasick. We don't think about bringing home mosquito bites and bed bugs from the cottage or that retiring at 35 is actually pretty boring. Remember to think about the day-to-day impact of what you want to purchase. In this case, it really is about the details and not the big picture.
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