The Covid-19 quarantine has inflicted a series of unprecedented social-science experiments upon us.
Nobody signed up for these experiments, and many of these changes have been difficult. But it would be a shame to not use the current situation to learn more about our financial and lifestyle preferences. Here are three experiments many of us have been pulled into that could provide insight into how to boost our happiness and financial security when the current crisis subsides.
As a behavioral economist, I’ve always recommended that people take a retirement test drive, trying out their new lifestyle in much the same way one might try out a new car. I recommend this because people often underestimate how much they miss the social interactions and sense of purpose that come from work.
Research led by Martin Weber of the University of Mannheim in Germany shows that many people with high levels of present bias—meaning they tend to excessively prefer rewards that arrive right away—leave the workforce on the early side. They also tend to regret the decision within a few years.
It’s a common mistake. According to a study by the Federal Reserve, more than 1 in 4 retired workers eventually return to the workforce. One of the leading reasons is that many retirees don’t actually like being retired.
Under normal conditions, it’s very difficult to take a retirement test drive because most of us are too busy to put our work life on hold. But the Covid-19 pandemic can serve as a preliminary test of what it feels like to stop working—especially for those who have been furloughed or told to work part-time from home.
If you find yourself struggling with the social isolation, you might want to rethink your retirement timeline. Instead of trying to retire as soon as possible, consider working for several more years. Many people miss their colleagues more than they enjoy the extra leisure time.
Retiring later can also dramatically improve your financial security. Generally, for every additional year of work, your retirement income will go up around 5% to 10%.
The Covid-19 pandemic has triggered a massive decline in consumer spending. Data from NPD, a collector of payment data, show that spending in late April plunged 23% compared with a year earlier. This drop offers a unique opportunity to gain key insights into the relationship between spending levels and well-being.
Researchers tend to agree that poverty exerts a steep emotional toll. But there’s still an extensive debate among academics about whether money can buy happiness, at least once a person has enough money to cover the basics.
For instance, a study by Nobel Laureates Daniel Kahneman and Angus Deaton suggests that the emotional benefits provided by money begin to diminish once people earn more than $75,000 a year. More recent studies suggest that the cutoff is closer to $105,000.
At the same time, research by Ashley Whillans of Harvard Business School shows that money can buy happiness—if it is used to buy more free time. (It isn’t the fancy lawn mower that makes you happy—it’s paying someone else to use it.) According to Dr. Whillans, timesaving purchases are especially effective now, as they allow working parents a brief reprieve from the stress of the pandemic.
I believe that one reason the academic studies provide conflicting results about whether money can buy happiness is that money affects people differently. The Covid-19 pandemic can help you learn how it affects you.
First, figure out exactly how much spending you have cut. Take a look at your credit-card bills and compare your current spending to what you spent this time last year. Have you cut 15%? 25%? 40%?
Then, think about how the drop in consumption has affected your happiness. If the impact has been severe, keep monitoring your feelings as life gradually returns to normal. Do you feel the same way when you are spending just 10% less? What about 5% less?
On the other hand, if you have remained content despite spending significantly less in recent weeks, that suggests you could be saving a lot more.
One of the concerns about encouraging Americans to save more is that it might lead some households to take on expensive debt, as it’s typically hard to cut spending. However, if the Covid-19 crisis has taught you that you can spend less and still be satisfied, try raising your savings rate to 15% or more.
Many behavioral scientists believe that people don’t spend money very effectively, at least if the goal is to maximize happiness.
Thomas Gilovich, a professor of psychology at Cornell University, has argued that people overinvest in things at the expense of experiences. The problem with things, such as that new sweater, is that we habituate quickly to the objects, and they stop giving us pleasure. Experiences, in contrast, tend to generate pleasurable anticipation and nostalgia. Even after the vacation is over, it continues to make us happy, as we reminisce with loved ones and browse through the photos on our phone. And these experiences don’t have to be lavish: a walk in the woods can make just as happy as a fancy resort.
The pandemic provides a unique opportunity to discover which categories of spending make us happiest.
Perhaps we’re used to eating out several times a week. How much do we miss restaurants? Or maybe our gym reopens before our favorite clothing store. Which increases our happiness more? Such insights should help us better allocate our resources, both before and during retirement.
As a rule of thumb, eliminate spending on what you don’t miss. If you miss something just a little, try cutting your spending on that category in half. Invest in what really moves the needle.
Of course, these experiments are imperfect. For one thing, they fail to take into account the impact of peer comparisons. It might be less-satisfying to eat at home once the quarantines are lifted if friends are talking about the delicious meal they had at the hot new sushi place.
In addition, the stress of the pandemic could be distorting our preferences.
Still, don’t let the current crisis go to waste. We are living through a period of profound social disruption, and it is important that we learn whatever we can from it.
Dr. Benartzi (@shlomobenartzi), is a professor and co-head of the behavioral decision-making group at UCLA Anderson School of Management and a frequent contributor to Journal Reports. Email him at email@example.com.