Arun Abey: Material outlook shows signs of wear

We've all become used to thinking about the cost of things in terms of money. While this is convenient shorthand, the danger is that we end up like Oscar Wilde's definition of a cynic: "Someone who knows the price of everything and the value of nothing."

How do we compare the merits of a job that pays us more than our current one, but will not make us feel as satisfied? If fulfilment is the ultimate goal of life, then why shouldn't this be the currency that we use to make such important decisions?

Recognising the limitations of measuring everything in money terms, economists came up with the useful concept of "opportunity cost", which measures cost in terms of the next best thing we have forgone. As the Dutch mathematician Daniel Bernoulli said as early as 1738: "The determination of the value of an item must not be based on its price, but rather on the utility it yields."

In this spirit is the concept of "hedonic opportunity cost", where the measurement is happiness forgone ("hedonic" means to do with pleasure). A closely linked idea is "hedonic arbitrage", which refers to the potential to increase happiness without any increase in spending or wealth.

As Christmas approaches, working out how to apply this concept can be an invaluable way of avoiding over-spending and racking up too much debt for no gain in wellbeing.

Behavioural researcher Shlomo Benartzi, a professor at the University of California, gives the example of a buyer comparing two similar models of a car. The deluxe version costs $15,000 more than the basic model, but has slightly superior features. When simply comparing the two models, naturally people prefer the superior features. But when the comparison is framed differently - recognising that the $15,000 can buy, for example, several years of holidays and weekends away - then the result may well be different.

Benartzi's research shows that in this case buyers are much more likely to consider the basic model sufficient for their needs. Most people simply do not consider what else that $15,000 could buy - highlighting the importance of how we frame decisions and the impact on our happiness.

The fact is that every day we are inundated by salespeople trying to sell us more. We need to take responsibility for our own happiness and ensure that we make spending decisions from a broader perspective.

One way to do this is to divide your expenditure in terms of 10s, 100s and 1000s of dollars and think of what makes you most happy in each of these categories.

For $10, for example, you could go for a beach walk with a cherished family member and have a coffee together afterwards. It's a simple way to exercise, connect with others and feel lots of pleasure for a small expenditure. Often the goodwill lasts for much longer afterwards.

It's a similar situation with $100. You might go out for dinner and see a show with some good friends. It's a bit more expensive, however you also experience a great feeling of lasting pleasure - you're getting really good bang for your buck.

However, when we start spending thousands of dollars, you really get a big hit of pleasure when you make the purchase. You might be buying that cool car you've always dreamt of. But, as many of us know, the feeling doesn't always last. This response is something car manufacturers are acutely aware of as they pump out new models every year.

Think about it this way: imagine your house caught fire and you had just a few minutes to save a few precious things from the burning building. Most people will go for items such as the family photo album and other personal treasures. Expensive items such as the fancy new TV wouldn't even be a consideration for most of us.

These examples illustrate how the treasured, personally fulfilling things in life aren't necessarily related to money and material success. In fact, wellbeing often relates to activities, not things - activities that foster a sense of connection and create positive emotions, providing long-term satisfaction. The buzz from an expensive new car isn't long-lasting in that way. This shift in perspective helps us to reframe how we think about and use money while focusing on creating authentic feelings of wellbeing without the need to spend outrageously.

However, it is hard to escape the conclusion that long-term success with money, including investing, is impossible to separate from success in life. Financial security and independence are important to most successful people. But the real challenge is finding a healthy balance between this and other important values, such as authenticity, competence and belonging.

Learning the power of giving with meaning is the final act which can help us to reframe our thinking and strike this balance. While there is strong psychological research showing that having a positive effect on others increases the giver's sense of wellbeing, we are not born with this knowledge. People consistently overestimate the impact on their wellbeing of acquiring things and underestimate the impact of giving, especially to those to whom they have an emotional connection.

A visit to the website of the micro-finance charity Kiva, which connects lenders with poor entrepreneurs, is a useful way of overcoming this. The beauty of the Kiva site is that you can buy gift vouchers for as little as $25 and you can use it to create a real experience, both for kids and adults.

Initially kids are a bit dubious about what to do with their gift certificates. But Kiva allows them to browse through the profiles of entrepreneurs in a variety of countries and choose someone to whom they can lend money. They can see directly how they are helping a real person make great strides towards economic independence and improve life for their family.

Throughout the course of the loan (usually six to 12 months), they can receive email updates and track repayments. Then, when they get their loan money back (the repayment rate is around 98 per cent), they can re-lend to someone else.

An emotional connection is created with the recipient, both initially and ongoing, the giver gets significant emotional capital in return for a small dollar investment, and the beauty of the whole process is that it is automated.

Arun Abey is executive chairman of financial planning firm ipac, head of strategy for AXA in the Asia Pacific and a director of the Spicers Portfolio Management advisory board. He is also the author of How Much is Enough? www.howmuchisenough.net