Managing Your Insatiable Appetite for More: Getting Off the Hedonic Treadmill
We have probably all heard the stories of big-name stars or athletes who, having earned millions during their careers, suddenly made the news because they had to declare bankruptcy. For example, Nicolas Cage who had reportedly built a fortune of more than $100 million over his career, has had tax liens placed on multiple properties for failing to pay his taxes.
Robert De Niro, who is 76 years old, cannot retire because he cannot afford to keep up with the lifestyle to which he has become accustomed. His ownership interests in a restaurant and a hotel during the Coronavirus pandemic certainly have not helped, of course.
According to an article posted on CNBC, lottery winners are more likely than the average American to declare bankruptcy within three to five years.
The Hedonic Treadmill
Also known as hedonic adaptation, the hedonic treadmill is the tendency to quickly return to a stable level of happiness despite financial change in your life. You are 25 years old, relatively young in your career. You don’t own very much, you aren’t earning very much, and you aren’t spending very much. However, ten years pass; you are now earning more, allowing you to spend more and have more. In short, you are experiencing lifestyle creep. Are you any happier? Perhaps, but it is often the case that the feeling of happiness fades as you adjust to your new normal. You earn more money but now you need to own a new car that is commensurate with your status. Your home, which was perfectly adequate when you bought it, is now perceived as a “starter” home that you have outgrown. The average size of a new house in the 1950s was about 1000 square feet. In the 2000s it was over 2300 square feet. The average family size then: 3.5 people. The average family size today: 2.5 people. Houses have gotten bigger while the number of occupants has decreased. In this respect, the hedonic treadmill is not just an issue of personal financial management. It reflects the shift toward greater consumption in the entire society.
It is said that there has been a trend toward spending more on experiences than on things. That may be so, but it is still spending, even if the latest photo you post on Instagram is from your last trip to the Galapagos Islands rather than standing in front of your new Ferrari. You may still wind up toiling away at a career that you were ready to move on from but cannot because you are unable to afford retirement.
Getting Off the Hedonic Treadmill
The desire for more is hard-wired into the human brain. Even though scarcity might seem relatively rare for most of us today, it was a constant companion for large swaths of the human population in earlier centuries and is present today, even though humanity has made great strides in reducing worldwide poverty.
For those reading this blog post, however, the problem is how to restrain excess consumption now so that reasonable consumption can be made available later. Another way of putting it is, how can I convert a portion of the human capital I have now into financial capital to store up for my later years? What are some steps we can take?
Reframe Your Situation
Not surprisingly, some of the leading proponents of tackling the hedonic treadmill are those dedicated to achieving FIRE, that is, “Financial Independence, Retire Early.” A blog writer, who dubs himself “Mr. Inspire to Fire,” suggests reframing your current situation. This person had a $100,000 student loan. His attitude toward work was “I have to go to work to keep paying my student loans.” There was no happiness in this and so his financial accomplishments in reducing his debt gave him no pleasure. However, he decided to begin his day with a new “mantra” that gave him happiness and a sense of opportunity: “I get to go to work to pursue financial independence for a better future for my family.”
Reframing can work not just in terms of paying down debt. It can also work in terms of reining in your spending. Instead of seeking pleasure by spending more now, you can reframe your situation by seeing the benefit of saving for your future self, whether that involves helping your children afford post-secondary education, or further into the future when you want to retire. Depending on how you earn your money, COVID-19 may have had a severe impact on your finances. For those whose jobs were lost, people in service industries like travel and tourism, it has clearly been negative. However, for those who have not been impacted, the restrictions on spending have resulted in substantially greater savings. This situation of saving because you have nothing to spend your money on is an opportunity to make saving a regular part of your life as you realize that there are a lot of things you can live quite happily without.
Focus on the Journey, Not the Destination
Sorry for the cliché, but it is appropriate. In another context, poker champ and decision wizard Annie Duke wrote about the problem with “resulting.” When you think about a certain milestone that you have achieved, what does that feel like after you’ve made it, whatever “it” might be? Do you continue to feel a sense of joy or achievement? Or do you need to set a new goal because the joy from having achieved that milestone has evaporated over time and you want that euphoric sense back?
In this sense, the important thing is not the next destination, but the growth and strength that you are experiencing along the way. Focus on the thing that you can do now and can keep on doing, and appreciate that you have exercising a degree of control and discipline that you did not have earlier.
Go to Church… or For a Walk
As mentioned earlier, the hedonic treadmill is also referred to as hedonic adaptation. We get used to something good that has happened to us, adapt to it, and dissatisfaction rears its head again, driving us toward the next thing that will give us a “hit” of pleasure. Absolutely, there are people in poverty for whom life is very difficult, but it is not often the case that an increase in material wealth will lead to a lasting change in our happiness. We get used to the new life. As our income goes up, so too does our lifestyle. The gap between our income and our expenses that we need in order to save for the future never grows because our appetite for pleasure is never satisfied.
We need to alter our mindset, our perspective. How to do it? In the Journal of Economic Psychology, authors Daniel Mochon, Michael I. Norton, and Dan Ariely, observe[1] that:
certain seemingly minor events – such as attending religious services or exercising – may [provide a lasting impact on subjective well-being.] If people engage in such behaviours with sufficient frequency, they may cumulatively experience enough boosts to attain higher well-being.
People who engage in these activities experience boosts in happiness. These effects are cumulative. This is a reminder that happiness is generally less a goal than it is a by-product of engaging in something else, whether that be gaining a sense of the transcendent and/or community through participation in religious services, or the experience of physical well-being through exercise that translates into a sense of mental or emotional well-being.
There are some “tricks” that will help you save as well, like the “paying yourself first” approach of automating your saving. Automating your bill payments works, too. However, if your level of dissatisfaction continues such that you one hand saves while the other hand puts even more on the credit card, you are not going to get ahead. As so much of behavioural finance has shown, financial management is as much a matter of understanding who you are as it is a by-the-numbers process of setting up a saving and investment plan.
Resource
One of the authors of the journal article mentioned above is Dan Ariely. His book Dollars and Sense: How We Misthink Money and How to Spend Smarter, co-written with Jeff Kreisler, is a very good and humorous look at this subject and of behavioural finance more broadly.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.
[1] “Getting off the hedonic treadmill, one step at a time: The impact of regular religious practice and exercise on well-being” Journal of Economic Psychology 29:5, November 2008, Pages 632-642.