In a recent post called What we can learn about a happy retirement from a kid eating chocolate I mentioned the fascinating field of hedonomics. Hedonomics uses the application of economics principles to study happiness. It is not concerned with what happiness is or whether it is good to pursue happiness. Rather, hedonomics is interested in how humans make decisions to maximize their happiness.
In that post I mentioned one important finding from the field of hedonomics – that an increasing reward provides more happiness than a steady state but overall higher reward (read the previous post for more details).
Today I’m going to talk about a related but different idea – hedonistic adaptation.
Hedonistic adaptation is the idea that humans eventually adapt to any change in happiness caused by positive or negative events in their lives.
Let’s say you want to buy a new car. You’ve picked the perfect model – you like the way it looks, the way it drives, and most importantly, the way it makes you feel. If you buy this car you will, in fact, be happier. Unfortunately, whatever increase in happiness you have from the new car will be short-lived, and in time you’ll return to the same state of happiness you were in before you bought the car (all other things being equal, of course).
Similarly, a negative event, like being laid off, make us unhappy in the short-term. Eventually hedonistic adaptation kicks in and we return to the baseline level of happiness we were in before.
It’s important to note that some life changes result in long-term changes to the baseline level of happiness. For example, people in prison were found to have lower baseline happiness levels than they had before going into prison, but after they were released from prison their baseline level of happiness returned to the original level. Divorce was also found to result in a lower permanent level of happiness (until a person remarried).
One theory behind the cause of hedonistic adaptation is that as wealth and success increase, so do expectations for future wealth and success.
I have experienced this first-hand.
At the end of my freshman year in college a few friends and I were sitting around talking about our summer plans. One of my friends was a year older and had spent the previous summer as an intern at a Silicon Valley tech company. The rest of us were asking him about his experience.
“Did you like the company?” I asked.
His response was pretty noncommittal, “Yeah, sure. It was fine.”
“Would you work there if they offered you a job?”
“They did offer me a job”, he responded.
“You already have a job once you graduate?” I was incredulous. I mean, come on – who would offer a kid a full-time post-graduation job after only a single summer of work, right?
“No, they offered me a job effectively immediately. They wanted me to continue working instead of going back to college for my sophomore year”.
I had never heard of such a thing! Now I was REALLY curious. “How much did they offer you to stay?”
“$120,000 plus bonuses and stock options.” he replied
I almost fell off my seat. $120,000 in 1994 for a kid with 1 year of college was insane.
I blurted out the first thing that came into my head, “why the hell did you come back to school??”
Frankly, I thought he was a complete idiot to not take that job. Making $120,000 at 19 years old was like winning the lottery! I remember thinking that it would be IMPOSSIBLE to spend that much money. It would be like the movie Brewster’s Millions. I thought that even if he TRIED to spend that much money he wouldn’t be able do it.
Twenty years later I see that it’s incredibly easy to spend that much money. My first year out of school I made a $65,000 base salary. The next year I got a raise to $80,000. The third year I was at $100,000 and the fourth I was at $120,000. I was now making as much as my friend had been offered and yet it didn’t seem like a ridiculous amount of money anymore. I’d slowly become accustomed to each increase in pay.
Mo Money, Mo Problems
Like most people, as I made more money I spent more money. I quickly realized that no
matter how much money you make, you always wish you had just a bit more. A raise will initially make you happier but over time you adapt to the higher salary. You expect that new salary. You take the new salary for granted. You’ll get used to the things that higher income can buy, and those things no longer provide happiness and you return to your base level of happiness.
This is something that I think the writers of the financial blogosphere have realized. Here are some examples of recent posts (from some of my favorite blogs) that deal with hedonistic adaptation:
- A recent post from “Think Save Retire” called No more stationary homes please talks about the issue of eventually getting accustomed to any place you live, no matter how awesome it is.
- Jason Fieber (formerly of Dividend Mantra, now with a new site called Mr Free at 33) posted about the importance of new challenges in retirement called Why much of the math on early retirement is moot. The point of the article is that hitting financial independence was just a step in his journey, not the end goal. He’s realized that he needs accomplishment and meaningful work to be happy, not a bunch of stuff.
- Financial Samurai has a very popular post called How To Make Six Figures A Year And Still Not Feel Rich – $200,000 Income Edition. This is an example of somebody “scraping by” on $200,000/year because they keep adding things to their budget to stay happy.
Financial choices to maximize happiness
So what financial choices can we make that DO lead to longer term happiness?
First, by definition, you don’t adapt to continual improvements. Perhaps this is why I (and so many other financial bloggers) derive such pleasure from investing. Every year your dividends should be growing. The rents you charge should be increasing. Your total net worth should be increasing. And because these numbers are constantly growing you don’t suffer from hedonistic adaptation. Just as you get used to $5,000/year in investment income that number increases to $5,500 the next year. Progress = happiness.
Incidentally, this is also why learning, developing skills/talents, and producing things results in increased happiness. You are continually improving yourself. Progress = happiness.
Second, when you spend money, research has also found that buying experiences provides more happiness than buying stuff does. We’ve already established that due to hedonistic adaptation, the happiness from purchasing things fades over time. However, it turns out that the happiness from experiences does NOT decrease over time. You enjoy not only the experience itself, but the memory of the experience. If you’re trying to decide between a new couch or a trip to Europe, the trip will almost certainly provide more and longer lasting happiness.
Third, it turns out that unearned income doesn’t actually make people any happier. Humans derive satisfaction from being rewarded, but only when those rewards are deserved. It turns out that entitlement programs such as Social Security don’t actually make people any happier. (Note – this doesn’t mean we shouldn’t have these entitlement programs, only that the programs don’t actually make people happier)
Finally, and I think this should go without saying but I’m going to say it anyways – the things that truly bring happiness are relationships, friends, and personal growth/accomplishments. Spending money on experiences is better than spending money on stuff, but spending time with family and friends trumps both of them. Focus your time on family and friends and you’ll be surprised at just how happy you can be.
Hedonistic adaptation can be a powerful motivating factor. For most people it leads them to believe they can buy happiness through bigger houses, nicer jewelry, and fancier clothes. They are addicts. They buy something, get a “hit” of happiness, then when the happiness fades they need to buy another “hit”.
It turns out that the saying is true – money can’t buy happiness. However, it appears you can rent it for a little while if you’re willing to pay the cost.