Contrary to what most economists think, there is some evidence that people do, indeed, value having options. In an ingenious study, George Loewenstein, a psychologist at Carnegie Mellon University of Pittsburgh, examined the choices of Halloween trick-or-treaters. On Halloween, 1993, kids coming to his house in Pittsburgh were offered a pile of candy bars and told they could pick two. All the kids picked two different candy bars. Now, everyone has a favorite candy -- be it Snickers, Milky Way, or Three Musketeers -- so if people wanted to maximize the expected utility of their future consumption, they would pick two of the favorite bars. This behavior is not limited to children, either; college students acted the same way.
If it is the accrual of possibilities, and not just goods, that explains why people apparently wish to have more money, the notion also explains why spending money is not as satisfying as you might hope. The act of buying something closes off any number of other possibilities. You lose potential information during the act of a purchase, which psychologists call regret. You make decisions with one eye toward the desired outcome and the other on possible outcomes (often referred to as "counterfactuals.") Thus the choices you make come, in part, from the desire to avoid regret. Buyer's remorse -- the sinking feeling that you shouldn't have made a major purchase -- occurs because you also consider the other things you could have bought with that money.
The logic of this argument leads to a rather surprising conclusion. First, if you have enough money for basic needs, with some cash left over for modest discretionary purchases, then acquiring more money will lead to fewer, not more, new possibilities on a per dollar basis. Second, once you earn enough to have discretionary money, you shouldn't spend it. Having options is a good thing, and therefore losing options -- when you spend money -- is a bad thing.
If economists hate the suggestion that people don't, in fact, compute expected utility , but rather count potential purchases, then what I have just suggested will strike them as completely daft. Economists will point to the fact that people struggle to increase their income so that they can spend their earnings on bigger and fancier items. The question on my mind, though, is not what most people do with money but why money doesn't lead to lasting improvements in well-being for most people. The answer lies in what you do to get the money.
Excerpt published with permission. Copyright © 2005 Gregory Berns.