When asked about the “dismal science” and what exactly economists do, most people think they study money.
In fact, economists use various analytic tools to predict behavior. But, the public is partially correct because the majority of economists’ predictions deal with financial matters. When economists talk about new houses, for example, their focus is invariably on the factors that determine housing prices, such as mortgage interest rates.
But some economists have gone in an entirely different direction. Rather than study dollars and cents, they have used the analytic tools of their discipline to explain other phenomena, such as why people make certain choices.
In the past, economists assumed that an individual’s choices were always guided by rational self-interest. Today they recognize that human foibles, biases and our hunter-gatherer origins can often be the critical factors that affect an individual’s choices.
University of Chicago economists Luis Rayo and Nobel laureate Gary Becker have carried this current approach one step further and used the contents of their “economic tool box” to predict which choices make people happy. Their research is based in part on careful study of recent developments in psychology, biology, evolution and neuroscience, including brain scans.
In a recent interview, Rayo discussed their research on happiness as it applies to the purchase of a new house, an enterprise that most buyers find is fraught with emotion.
Before you fall off your chair guffawing, insisting that you know happiness when you see it and that some pointy-headed economist couldn’t possibly say anything that would be helpful, listen up. You’re likely to find that much of Rayo and Becker’s research resonates with your own experience.
Rayo began our conversation on a philosophical note. “What is happiness, exactly? Much of what we call ‘happiness’ is relative and based on comparison,” he said. “We are always comparing what we have to something else. But, we’re not anticipating that no matter what we have we will always be comparing it to something else. In fact, we’re not even aware that we are doing this.”
The choices that make people happy are all over the map, but when you examine the data carefully, similar patterns emerge, Rayo said. In that respect, buying a new house is not so different than buying a car or choosing a restaurant for dinner.
When you start to think about buying a new and bigger house, your initial comparison and reference point is size, Rayo said. When you start to look at the big, new houses that are for sale, however, you discover that size is only one of many comparisons to be made. Size, price, location and floorplan configurations soon loom large and become new reference points, which Rayo characterized as “moving targets, which constantly change.”
Eventually, you pick a builder and a model, build it and move in. The change is dramatic. Nonetheless, you quickly become accustomed to your new surroundings, and these become your new benchmark, against which you now make new comparisons, such as how your house stacks up against the others in your neighborhood or what you could have done with the money instead.
As you ruminate on these matters, you start shopping for furniture to put in those empty rooms in your bigger house. At the furniture store, you find they have 20 oversized sofas on the floor — more comparisons! You select several oversized pieces for your family room, and quickly move onto considering an outdoor deck for lounging and entertaining during the approaching summer weather. You keep expecting that you will finally become sated with all things related to the new house, but the considerations are endless. The deck project lead to discussions about possible decking materials, as well as outdoor grills. …
Meanwhile, you discover several unpleasant aspects to living in your new place. A house that’s twice as big requires twice as long to clean, and the commuting time to your office is now two hours a day instead of only 30 minutes. Though it’s easy to become accustomed to a positive change and move on, you never get used to activities that are painful and irritating like a long commute, Rayo said.
This unending cycle of serial interests and constant impulse to compare what we have now with what we might have in the future is wired into our brains, and there’s an evolutionary reason for it, Rayo explained. Fifty thousand years ago, when we were hunter-gatherers, it served us well. To elude predators, our eyes developed the ability to judge moving objects and colors by comparing them to the background landscape. To ensure there would be enough food and water for everyone, our brains developed the ability to continually look ahead and press on to find new food sources.
In today’s world, however, this survival strategy does not always serve us well, Rayo pointed out in stunning understatement.
More importantly, he went on to say, the psychology literature and surveys clearly show that all happiness in life is not ephemeral and geared to endlessly moving targets. With nonmaterial things, the target does not move. “Exercise will absolutely make you feel better. Your social network, family and friends can bring permanent happiness. Longtime relationships can bring long-term satisfaction.”
One reason for this, Rayo explained, is that our relationships with friends and families do not have a lot of “status differentiation.” Though you may think that this sounds ridiculous, Rayo said that brain scans and hormone fluctuations in our bloodstream show that our brains are designed to know where we fit into the pecking order, and we’re uncomfortable when we’re not among equals. Our brains are also very sensitive to material success and who has more or less than we do.
How does this square with a housing choice, and which one will make us happy? Rayo suggests a house with enough space to meet your needs while accommodating a practical, relaxing lifestyle. Everyone’s situation is different, but as you make the decision, he said, be honest about your motivation.
Will the added square feet in the big, new house make you more comfortable? If the goal is to impress your peers and friends, “You’ll lose the race of winning and you’ll be stressed,” he said. Is your kitchen a place to hang out and be comfortable or will it be, as Rayo put it, a “slick intimidation statement about my wealth?” Will the $50,000 array of solar panels on your new roof that will generate all your household electricity need “bring a sense of personal satisfaction or give you bragging rights”? The latter are “not a sustainable source of happiness,” Rayo said, adding that, “When consumption extends beyond your needs and the goal is to impress others, you should be suspicious; it will not lead to happiness.”
Does Rayo follow his own advice? He lives in a condo in downtown Chicago that is only a 10-minute train commute from his office. He doesn’t have a car. His condo is modestly sized, two-bedroom unit. He spends a lot of time with his wife, he exercises, but he confessed, “I’m not immune to status seeking. I spend a lot of time working.”
What is the scientific proof that a modest lifestyle is the path to happiness? Rayo said one example is Buddhist monks. They eat the same food and wear the same clothes everyday. With years of meditation they lose their interest in the “next new thing and the moving target. And, their brain scans show that they are happier than most people in a scientifically measurable way.”
Questions or queries? Katherine Salant can be reached at www.katherinesalant.com.