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First, because people have an inherent propensity to be fair to others, recipients of generosity feel pressured to reciprocate it. Thus, when you are generous to others, you attract generous behaviors from them in return. In other words, what goes around, comes around.
Second, in a phenomenon known as homophily, when you are generous, chances are, you will attract others who are similarly generous to you. And hanging out with generous and compassionate people is, for obvious reasons, more happiness-enhancing than is hanging out with self-centered and materialistic people.
Finally–and this may be the most important reason why being generous enhances happiness levels–is because of the story you tell yourself. When you are generous, the story you tell yourself is that you have everything you need and more, which is why you can afford to be generous. In contrast, when you are miserly and greedy with your affection, the story you tell yourself is that you are a beggar who is dissatisfied with what you have and that you need more to be happy.
A well-kept secret to happiness, then, is to practice generosity. To derive a boost in happiness levels through generosity, however, it is not enough to recognize the link between the need to love and happiness; it is important to explicitly exhibit generosity—or “giftivism,” as Nipun Mehta calls it.