“Money never made a man happy yet, nor will it. There is nothing in its nature to produce happiness. The more a man has, the more he wants. Instead of its filling a vacuum, it makes one. If it satisfies one want, it doubles and trebles that want another way.” Benjamin Franklin
Quick question: how much more is $100 worth than $10? Easy, right? It’s clearly worth 10 times more, isn’t it? Quantitatively, that would be correct, but human emotional experience is rarely quantitative, and money is no exception. Instead, a person’s utility of money experiences diminishing marginal returns just as surely as any other consumable good, often varying drastically from the linear progression of numbers.
What are diminishing marginal returns? Think of a lemonade stand in the summer. You’ve just been working for a few hours in the hot sun, and across the street you see that the neighbors adorable kids have set up a lemonade stand. Your thirst response lights up like a 5-alarm fire and it’s all you can do not to run over and guzzle their entire supply. You probably think to yourself that lemonade is the best thing in the world, and if they told you it was $10 a glass you wouldn’t hesitate to fork it over for that sweet refreshment. But fortunately, these sweet kids don’t fully grasp your predicament of the economic vulnerability it creates in you, and are only charging 25 cents. So you fork over a measly quarter and down the glass in one fell swoop. It tastes like liquid gold and you think to yourself, “Why did I never realize how amazing lemonade tastes?!”
Of course, at this fantastically low price, you figure you might as well have another glass! The second glass still tastes pretty darn good, and you’d have probably paid $5 for it, but these sweet kids still haven’t caught on to your thirst dilemna and are still charging the same 25 cents. After the third glass, which you mentally gauge you’d probably have been willing to pay $1 for, because it’s still pretty darn good lemonade, but you’re much less thirsty than when you first approached their stand. But still, it’s pretty hot out, and you’ve been sweating for a few hours, so you buy one more glass for good measure. After all, it’s still only a quarter! But now you’re feeling like it’s worth about what their charging, so it’s not a bad deal, but you’re not making out like a king.
After you finish the 4th glass, the neighbor’s sweet 5 year old daughter looks up at you and asks you if you’d like another. By now, some of the sugar has gotten to your head and your thirst is pretty well raked. So you think to yourself, “Is a glass of lemonade really worth 25 cents to me?” And it’s not. That same glass, of the very same lemonade, that just 3 minutes ago you’d have paid $5 for, now isn’t worth a quarter to you. You sure as heck wouldn’t buy 10 more glasses of lemonade. Welcome to the world of diminishing marginal returns.
The interesting thing is, that money itself has diminishing marginal returns. $100 should be worth twice what $50 is, right? That’s the very nature of money! If you have twice as much, it must obviously be worth twice as much! But take the concept of money out of the picture, and go back to the lemonade example. If I gave you $50 to spend, you’d spend it on whatever was at the top of your list of things that you most would like to have under $50. If I gave you an additional $50, for a total of $100, you’d then spend it on the next item or items on that list, but which weren’t as “valuable” to you as the item(s) you purchased with the first allotment of $50. Now carry that out to infinity, and imagine I keep giving you $50 (or $50,000) every time you asked for it. Pretty soon, you’d run out of things you really wanted to buy and would just start throwing money around on whatever whimsically crossed your mind.
There’s an additional psychological element at play here. More is less. And not just in the world of makeup. When you exceed a certain amount or number of possessions, your cumulative enjoyment of those possessions actually decreases! This has been scientifically shown in countless studies. You might think that if you’re a certain level of happy right now, and you added something to your “pile”, you’d most certainly me more happy. But that is simply not the case, for many reasons.
For starters, when you have more spending power, and use it to buy more “stuff” easily, each item that you possess becomes less and less special, because it’s just one of many things you own. Compare the appreciation that a homeless child would feel towards the one ragged toy in his possession, while the spoiled child of wealthy parents who bestow countless gifts and possessions on their child, only to wonder why the child doesn’t value or respect anything he or she owns, and is constantly asking for more and more.
On top of that, every new possession gained results in an incremental loss of enjoyment from each possession that you already owned, not to mention the added stress of keeping track of one more thing in your life, and the subsequent feeling of loss and waste that you don’t have enough time in your life to enjoy everything that you have. You used to have all the time in the world to spend fishing, or having a beer with your friends on the porch, until you got that fancy new Porsche, a nice new set of golf clubs, and a condo on the beach. But every time you enjoy one thing, you’re giving up the chance to use each and every other thing you have! This process then exacerbates itself because now you’re frustrated that you’ve got all this stuff and why isn’t it making you happy, and that just makes you even more unhappy!
Now we’ve gone from diminishing marginal returns of money to negative marginal returns. More money makes you less happy! Remember our lemonade stand? Let’s take that one a little further. All of a sudden, these sweet kids of your neighbors unleash their sadistic side. Before you know what’s happening, they’ve strapped you down in one of their garden chairs, and start funneling lemonade into your mouth! What started as delicious refreshment now is making you sick, and your belly feels like it’s about to burst. If they kept going, it would eventually kill you! Granted, this is an extreme example, but money has the same effect on people in so many ways. At first, it feels awesome to have lots of money, but after a while that money comes with a higher price than the “value” it grants the owner.
Wait, that can’t be right. We all have grandiose dreams of what we’d do if we had a million dollars, or heck, why not a billion? When Warren Buffett announced that he was sponsoring a contest that would award anyone who picked a perfect bracket for the NCAA men’s basketball tournament one billion dollars, how many people started spending that money in their heads. Lottery sales are infinitely higher when the payouts are higher, which doesn’t make sense because we’ve just proven that a higher amount of money will actually make you less happy! But because we’ve adopted money as our absolute purveyor of value, and money is expressed in linear quantities, we’re trapped in the great capitalist lie that more is always better. Mathematically, one billion is one thousand times more than one million. So therefore one billion dollars must be one thousand times better than one million dollars! But money is NOT value. Money is a means to an end, not the end itself. The end is happiness, and happiness is not linearly related to money. Just like lemonade.
So what to do? We need money to live, so clearly the answer isn’t to throw it all away and reject the whole monetary system! We know that $0 isn’t enough to live on, and we’d be really unhappy if we couldn’t afford basic necessities like rent and food on the table. But we’ve just discovered that an unlimited amount of money makes you unhappy too. So where’s the sweet spot? What’s the magic number? Turns out, for most people, it’s $75,000 per year. Enough to afford the essential basics, plus a few luxuries here and there, but not enough to incur the detrimental effects of negative marginal returns that we discussed above. Kinda like Goldilocks and the 3 bears – not too much, not too little, but just right. 🙂