Good reads from around the Web.
A short article in The Economist this week entitled Keeping Up With The Karumes (search result) provided an interesting look at happiness and inequality.
If you’ve been reading the personal finance blogs for a while, you’ll already know that after a certain point more money supposedly no longer makes you happier.
Moreover, it’s impossible to determine from existing studies whether already happy people get richer – rather than people being made happier because they get richer.
Maybe if you’re happy you have more successful friends who are happier to introduce you to their own friends or employers who have access to the better paid jobs, for example?
Or maybe happier people make their own luck in other ways?
Heaven knows I’m miserable now
The new study cited by The Economist tried to disentangle all this by randomly distributing money to some households in Kenyan villagers but not to others, like some mercurial minor god with a clipboard.
It found that people who got the money were indeed made happier – and less stressed – by it.
Those who got nothing felt worse.
So far, so “they get paid for this?”
But the interesting part for soppy-minded fools like me who worry about rising inequality is that the unhappiness downside apparently outweighed the happiness upside.
…the satisfaction of those who did not receive anything fell sharply as their neighbours’ fortunes improved.
The decline in satisfaction prompted by seeing one’s peers get $100 richer was bigger than the increase of satisfaction from getting a handout of the same size.
And pertinently, it wasn’t inequality itself that seems to have bothered the villagers, so much as the notion that they were suffering from it:
Participants in the experiment shrugged off changes in the Gini coefficient of their village, which measures overall inequality.
Take the example of a village in which one person gets richer, and another gets poorer. The village is less equal, but the mean income is unchanged.
In the Kenyan experiment this did not matter to the rest of the village.
Instead, participants compared how well everyone else was doing (the village mean) to themselves.
In other words, inequality is alright as long as somebody else is suffering from it.
We hate it when our friends become successful
Of course, as an ardent capitalist I’d point out this experiment is an imperfect reflection of the real Western world, which tends to inequality for a variety of different reasons – some good, some random, and some undesirable.
For example, capitalists play a big role in innovating and improving everyone’s lot through their risk taking (no, not every last capitalist, but in general that’s what the system does).
So in a real-life society, feeling unhappy that some capitalists are millionaires and the rest of us are relatively poorer might be outweighed by the improvement to our standard of living from having running water or electricity from local capitalists if you’re growing up in Africa – or by getting iPhones and Amazon Prime from Silicon Valley from the perspective of suburban Britain.
The ‘regular windfall’ experiment didn’t reflect that at all. It just made some people richer for doing nothing other than being lucky – as opposed to being seen to have made at least some sort of contribution or difference to justify their greater wealth.
The experiment if anything was a bit more like the ovarian lottery of inherited wealth that I’m so against…
…but we’ve just done that debate recently, so let’s put it to one side this week!
Stop me if you think that you’ve heard this one before
We might also wonder about the ethics of distorting the social politics of a bunch of Kenyan villagers to research whether comfy Westerners should be more laid back about oligarchs.
Good news, then, that the impact of extra money doesn’t last…
A year later the happiness of both the recipients and those who did without had returned close to its initial level.
…which is why the rat race is run on a treadmill, rather than to the victory line.
As the article concludes:
…when our own lot improves, we shift our reference group to those who are still better off.
In other words, we are never satisfied, since we quickly become accustomed to our own achievements.
Permanent striving might be good for economic growth as a whole – but it’s not likely to be good for your mental health.
From the blogs
Making good use of the things that we find…
Passive investing
- Playing the probabilities – A Wealth of Common Sense
- The trouble with bashing bond indexes – Canadian Couch Potato
- Diversifying UK equity exposure – Retirement Investing Today
- If one fund manager wins, another loses – Evidence-Based Investor
Active investing
- Buffett’s Berkshire Hathaway is cheap [Slide deck] – Whitney Tilson
- Primark? Good value, but its shares are expensive – UK Value Investor
- Generating investment ideas from data – Richard Beddard
- Don’t hold your breath for a US recession – Capital Spectator
Other articles
- Don’t risk it in retirement – The Retirement Cafe
- Why cutting spending won’t harm your love life – The Escape Artist
- A plethora of pensions – SexHealthMoneyDeath
- The state of the financial blogosphere – Abnormal Returns
Product of the week: The chef of the fleetingly trendy Chiltern Firehouse in London is looking to raise £1.75m through crowdfunding site Seedrs, reports ThisIsMoney. Fair enough, I have no problem with such investments for highly risk tolerant individuals who invest what they can truly afford to lose – because lose it is what many-to-most early-stage investments will do – and who can lock their capital away for years before finding out its fate. However only high-rollers need be guided by the perks here. Dinner for four if you invest £25,000? I’d say forget it unless you’re worth at least £5m… or you’re the chef’s mother.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
Passive investing
- Play the odds when investing – AARP
- Felix Salmon: Penny stocks are never worth it – Fusion
- Swedroe: Highest returns aren’t always the best – ETF.com
- Is the ‘value premium’ disappearing? – Bloomberg
- Six strange outcomes from distorted markets – Bloomberg
- US ETF fees are tending towards zero – Reuters
Active investing
- 4 long-term market-beating UK fund managers – Telegraph
- It’s unlikely the US stock market is in a bubble – MarketWatch
- Cor, what a commodity rout! – Bloomberg
- Beware of unicorns – Deal Book
- All about hedge funds, venture capital, private equity [Podcast] – Slate
Other stuff worth reading
- Stock market valuation matters… eventually – ETF.com
- Be cautious about the latest buy-to-let boom – ThisIsMoney
- How to invest in a profitable holiday home – ThisIsMoney
- Rare tax reliefs: The last of the loopholes [Search result] – FT
- [Insiders…] campaign for pension freedom age to rise [Search result] – FT
- The robots are coming, warns Bank of England insider – Telegraph
- Let’s move to Denmark! – Guardian
- How economists stole central banking from the bankers [Graphic] – WSJ
Book of the week: The financial literati are raving about John Kay’s new book Other People’s Money
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- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
> …when our own lot improves, we shift our reference group to those who are still better off
The key to this is to live intentionally. Britain today is stupendously richer than it was, and probably for people reading this blog, enough is within their grasp. The secret is to know yourself, and what matters to you. As Carl Jung said –
“The shoe that fits one person pinches another; there is no universal recipe for living. Each of us carries his own life-form within him–an irrational form which no other can outbid.”
Maybe what’s also missing in the study is a method by which to inject the “social” aspect of wealth differentials. As you say, the experiment simply made some people “lucky” and measured the impact of this on those around them, whereas our perception of fairness is also coloured to some extent by what proportion of a person’s wealth is “given back” and used to help support the community they live in.
If I see that my millionaire neighbour is doing his bit (with good grace) to keep social systems running for the benefit of us all, I’m far less inclined to have negative feelings about his financial good fortune. (The famous “we’re all in it together” effect).
“We hate it when our friends become successful”. How true. I had first experience of this many years when I sold my first company in my 20s. At a stroke my net worth leapfrogged that of even my banker friends. Most of my friends were delighted for me. But two friends’ – who were highly competitive financially-motivated *anker *anker types – had a reaction which really stung: they were obviously bitter and jealous about it. As it turns out both ended up leapfrogging me again in due course, and relations returned to an even keel. But their reaction taught me a lot about human nature.
I also remember a rather old study done on Australian aborigines and the end result of that research was they r wealthiest persons in the world because they don’t need anything. Money has been just around here since almost 2 or 3 thousands year so can we say our forefathers were not happy because there was no concept of money at all in those days. I believe unless material side of money is not linked with motivation and meaning in life any amount of wealth is not going to make us happy.
If you have a competitive attitude towards the people who get richer, then you feel miserable.
But if you feel identified with the people who get richer, then you get happier as well.
For instance: your daughter gets richer and you feel proud; your sports idol or favourite moviestar become millionaires and you feel good because they get the credit they deserve; your native hometown prospers and you are pleased; your usual department store grows and makes profits and you feel validated in your choice; and so on and so forth.
@FVL something to be said for not sharing your net worth or income with your mates. Maybe that’s what you learnt?
Love the Smiths, and your article reminded me to do a revisit, I can remember the pang of jealousy when a friend advised a small group of us that she had ISA cash savings of a reasonable amount, I have well surpassed the amount, but never divulge the amount I have even to close family, human nature is a funny thing.
I guess West has to change its scientific attitude towards happiness. Happiness can be driven from both material as well as spiritual means and both are poles apart. Many people who are poor but are happier than any richest men in the world. Money can only define fraction/one side of happiness- rest still has to be defined.
At the moment more money probably would make me happy. But I’d buy a new biro and save the rest. The happiness would tail off pretty quickly once comfortably FI (whatever that is!). But it’s the freedom and stability that would bring a cheeky grin. A side effect, nit the cash itself.
I was thinking about winning the lottery today as a few friends were getting fired up about euro millions. Sure it would be great in a way, but it takes away the challenge. FI through monk like spending = awesome. FI through a “handout” = not so much.
Someone send me a guide. I think I’ve gone off piste.
Somewhere in the last day or so have read the surprising view that the wealth gap is narrowing (contrary to Piketty et al).
To reach this statistic (UK only as I recall), first the Uber Wealthy were excluded; then the remaining top 10% were compared with the bottom 10%, the result wealth gap narrowing.
Cannot find the article, perhaps someone else can locate?
Certainly surprised me.
Suppose if statistics are contorted enough almost anything can be proved.
Magento – Maybe you are thinking of this from Politico. John Rentoul says One of the surprising things is that, since Tony Blair became Prime Minister in 1997, inequality of income and wealth has been broadly unchanged.. He also argues that things are likely to change over the next 5 years though.
If You want to retire early You should learn how not to live a lavish lifestyle. So Your mantra: money doesn’t buy happiness but freedom.
I judge my success by no metrics other than those I set myself. If others earn more, spend more, or whatever, then good on them. They’ve almost certainly worked hard for it, so let them enjoy it, and I’ll gladly learn whatever I can from them.
However, I’m not going to spend my money on the same things to try and impress them (or anyone else) as that’s not the way I’m wired. I’d rather be judged for my technical and business achievements than by how much I earn/have and the things I buy.
I think what the experiment described is finding is that we’ve got a hard-wired sense of fairness. It’s not that others were getting more but that they were getting it without having to work for it, while is rarely the case in the real world.
Somehow we have to find a healthier metric for ourselves than lining our own pockets. This week it was GP’s awarding themselves 2.4bn by swinging business to companies they own. I listen to small businessmen quietly discussing the dividends they’ve paid themselves as opposed to salaries to avoid tax. I read of people on minimum wage who actually take home the same as Junior doctors due to tax credits, child benefit and community tax reductions. Bankers? Don’t even start me. It’s exhausting, and takes up valuable mental space that I should be using to work out how to minimise tax on my pensions.
@Jim McG – that dividend loophole will be closed from next year as only the first £5k of dividends will be tax free?
Most of my friends are at the stage in their lives when they’re either getting bigger houses or new cars. I’m happy for them as it’s making them happy.
If I got a big pay rise, of course it would make me happier but not because I can buy new stuff with it but because I can save/invest more!
Anyway, been reminiscing this afternoon listening to The Smiths! 🙂
@Jim McG – the thing is people who are on minimum wage but “take home” more than a junior doctor (who deserves every penny and much more, I agree) only do so because they are supporting children on minimum wages. How could we want it any differently? There are kids involved – who didn’t make any choice in any of this, whose parents are working for peanuts. It is all wrong, but a minimum standard of living is just that. Somehow things have got badly skewed. Today has been very depressing, for all sorts of reasons.
@All. If you’ve not seen this then it’s worth a viewing.
How monkeys react to unfair payments…
https://www.youtube.com/watch?v=meiU6TxysCg
‘How much is enough’ is a pretty easy question if you have an a) realistically achievable and b) fixed lifestyle goal e.g. a fully paid off house big enough for your needs in a pleasant location, with enough passive income from investments to replace your job, fund your toys and pastimes and leave the corporate hamster wheel.
Hey presto! You’ve made it! You’ve won, and stuck it to The Man.
But if you keep shifting your reference point up and looking at what people on the next rung up appear to have (and bear in mind 90% of the time it is all on credit….whether it is bigger toys or houses) then that is a recipe for dissatisfaction with life.
Re: FIREvLondon I find the best competition is with yourself in terms of setting financial goals. The paradox of human jealousy means its probably easier to share achievements with a bunch of like minded strangers on the internet than friends or even family sometimes.
I’ve made a good half way stage goal recently in net worth terms, but can’t tell anyone about it!
This is a very thought provoking post, thanks and I’ve thought about it as I’ve gone about my day passing through some very wealthy areas and some pretty impoverished ones too. Although it’s tempting to say it is all about freedom, I’m not so sure it is.. I shared some very simple pleasures over a good couple of years with some very poor people but they were some of the happiest I’ve met and this was at a young enough age for it to have left a lasting impression on me as I was only about 14/15 at the time. Wealth and poverty are nearly always measured financially but that I think is the crucial mistake. People gain pleasure from myriad things, a starry night, a smile, a freshly laid egg, prayer and song and even the simplicity of a life which may be so because of the very limits of financial means. I’m not romanticising poverty at all, it is just that sometimes the limits of one’s existence can provide the constraints to focus on what is good about it. When your focus is purely on money and all it can buy you (for that is what it is for, after all?) there is never an end as there can always be more and goalposts constantly move (along with what that money can actually buy you). I think happiness is closer to us than we often think and the more simple our pleasures, the more we will likely be happy. Even if someone else is making life hell for us, our ‘heaven’ is what we find within us and in simple things and experiences. It is more than money can buy.
Money helps to solve some problems but it has nothing to do with happiness. Of course money gives some sort of joy when you get a larger amount than you expected or when you at last buy something you really wanted… But it takes just a moment. To understand that is enough to take a look at life at different countries: Africans living in the poorest regions think it would be great to always have something to eat, and middle-class Europeans think they would be happy living in luxirious villas and travelling a lot while many those who have that life are drug-addicted and end up their lives… People always take everything they have for granted.
How others feel about the wealth of others is not important when it comes to outcomes.
Outcomes are what matter. They are measurable and they are not relative, except to the individual and their family’s immediate past
How do we best facilitate people to work to support themselves, save to support their future selves? Are these not the questions our society should be addressing?
Whatever you think of the US constitution, they got one thing right. It is the pursuit of happiness that is important, not the fleeting emotion itself.
Parachuting in random gifts and trying to come to some conclusion about inequality seems an awful waste of resources.
“We hate it when our friends become successful”
Obviously not always true. a friend has been collecting old maps for years. He just told me he has had an offer of several hundred thousand for then. 8x his investment. I’m actually happy for him. Maybe it’s because I’m not skint though!
In spite of his good fortune, I’m sure his happiness will be curtailed somewhat by the arrival of HMRC for their pound of flesh:-)
“Thou shalt not covet […your neighbor’s stuff]” (Exodus 20:17): A recipe for happiness. God knew what he was talking about.
I can only speak for myself. When I became relatively wealthy it did make me a lot happier than before. That happiness comes from the security of not struggling to pay bills and the freedom to live without debts. It would make me unhappy if the government thought it would be a great idea to take wealth away from me. I’ve demonstrated that financial freedom can be achieved to a large extent by delaying gratification (cutting spending). I know that other people don’t want to live a financially free but Spartan life and that’s fine. What is not fine is for me to be penalised for my lifestyle choice by any kind of wealth tax. That would certainly make me unhappy.
Please, please, please let me get what I want.
A comfortable financial life, not made uncomfortable by the people around me not doing well.