DR 061: 6 Ways to Harness the Power of Hedonic Adaptation

Why does the excitement of a pay raise wear off in just a few months? Why does the “shine” of your new gadget or gorgeous new home wear off so quickly?

The answer is hedonic adaptation. Some people also call it the hedonic treadmill. It sounds philosophical, but it's really relevant to how we make financial and other personal decisions. Instead of just telling you what hedonic adaptation is, I'd like to give you an example.

This comes from the book Enough by John Bogle. He starts off his book with this very short story:

Two famous authors, Kurt Vonnegut and Joseph Heller are talking at a party hosted by a billionaire hedge fund manager. Kurt says to Joseph, “You know, this billionaire makes more money in one day than you’ll make in your whole lifetime from your novel Catch-22.

Joe responds, "Yes, but I have something he will never have. Enough."

Do you have enough? If not, then what will your life look like when you do have enough?

That's one of the hardest questions to answer. We are hardwired to constantly want more. We want a nicer car. We want a bigger bank account balance. We want a bigger home. We want nicer gadgets. We want a bigger TV.

When I was a kid, I was thrilled with the 19" color TV we had at the time. It was amazing. Can you imagine going over to a friend's house today to watch the Super Bowl on a 19" TV?

This brings me back to hedonic adaptation. It is a fancy term for a simple concept--while in the short term good and bad things that happen in our lives raise or lower our level of happiness, but over time we return to a constant state of happiness.

For instance, when we get a raise, we’re excited at first. Maybe we celebrate. Hopefully, we increase our 401(k) contributions. It’s fun to tell close friends and family about the raise.

But after a few weeks or months, we adjust to our new income level. Fast forward another year, and we expect another raise. If we don't get it, our current income that caused great happiness just 12 months earlier now is a source of pain and anger.

What’s happened? Well, we’ve simply adapted to the increase in our income.

This isn't a new concept. Dostoevsky knew all about hedonic adaptation. He said, "Man is a pliant animal, a being who gets accustomed to anything."

Hedonic adaptation is simply a part of being human. And it happens as a response to both positive and negative experiences. But here's the interesting thing: we adapt more quickly and completely to positive experiences than we do to negative ones.

We adapt more slowly to negative experiences, and there are some negative experiences that we never fully adapt to. In my personal life, for example, my father died in a car accident when he was 39 and I was 12. I adapted to that experience. It doesn’t affect my happiness today as it did when I was 12. But even now at nearly 50 years old, I can tell you that I never fully adapted to that major loss.

My guess is that you, too, have experienced losses that you'll never fully adapt to. But you do adapt somehow, as life goes on. But when it comes to positive experiences, we all tend to adapt much more quickly and much more completely.

So the question of the day is: How can we harness the power of hedonic adaptation to improve our finances?

There are six ways to harness this human experience to improve our finances:

1. Recognize Its Effect

The first way to harness the power of hedonic adaptation is to simply recognize its effect in our lives. I've had to learn to recognize it in my own life.

For instance, when my wife and I bought our first home in 1993, I can remember lying in bed that first night thinking, "I cannot believe all of this is ours!" We loved that home, even though it was very modest - a 50-year-old, three-bedroom, single-story home on .2 acres of land in northern Virginia. But it didn't take long for some of the shine to wear off.

In a few months, we got used to it. Then my thoughts were more like, "Yes, this is our house. It needs to be painted. And the gutters are falling off. My goodness, this house needs some work." Eventually, we got to the point where we asked, "How can we make this house bigger? Let's add a room."

We actually converted the deck of that house to a three-season room. Eventually, the home seemed so small that we decided to move to a bigger home. We were experiencing hedonic adaptation in its purest form. We got used to our house, and we returned to the level of happiness we enjoyed before we moved there in the first place. It didn’t even take that long to happen.

Another example is when I'd get a raise. In 1999 I got a huge raise because of what was going on in the legal industry at the time. Basically, all associates at most large law firms received huge raises that year (it was the precursor to the .com bubble).

It was exciting. But the excitement wore off just like it had with our first home. After a while, the extra money became the norm. It wasn't special anymore.

That same year, I bought my first nice car--an Acura TL. I'm not a car person, but I really loved that car. After a few months, it was just the car I drove to work or church or the store. In fact, I eventually sold the car because I'd rather have the money, and the car just wasn't that important to me. The key in all of these stories is that it's hard to recognize that the excitement of a new purchase will wear off when we are in the moment.

Think about it in the context of your own experiences. Maybe you got a raise or bought a new car or home or gadget. Maybe that thing raised your level of happiness for a while, but over time, that probably wore off. You just got used to it. It became normal.

And, eventually, you wanted even more. You wanted another raise or an upgrade for your home or that still-practically-new gadget.

Recognize the effect of hedonic adaptation in your own life. Of the six things we cover in this article, this is the most important. Before you can leverage the power of hedonic adaptation, you have to see that it's there.

2. Use it to Curb Your Appetite for More

Once you recognize hedonic adaptation in your life, you need to use it to curb your desire for a bigger home, a nicer car, a bigger TV, or better gadgets. Now, this doesn’t mean you never go out and buy anything nice. But you can take the knowledge of hedonic adaptation and think about how important this next big purchase you’re considering is.

Do you really need to move to a bigger home? Our second home is much bigger than our first home was. There have been times when I've thought about adding on to this home. But then I come back to the hedonic adaptation principle and recognize that it won't add an ounce of happiness to our lives.

So what do you do? You take knowledge like this, and you put it to good use.

For instance, I’m putting this knowledge to use by switching from Verizon to Republic Wireless. I’m getting rid of the iPhone, but I’m saving a ton of money. I’m a Mac addict, but the reality is, that the iPhone doesn’t increase my quality of life one bit.

The same is true with all the kinds of televisions that have come out since we bought our TV many years ago. Sure, TVs are "smart" now. But the reality is that one of these new gadgets won't increase our level of happiness.

So once you understand how hedonic adaptation affects your life, you can use it to inform your purchasing decisions going forward. This doesn't mean you never buy something nice or improve what you have. But you really have to think about how much something like this will impact your life - both in your level of happiness and financially.

3. Understand that Lifestyle Inflation is Hard to Reverse

Because of hedonic adaptation, it’s hard to go backward. You get accustomed to these new things. Then they become normal. You’ve effectively raised the bar for what it takes for you to be happy.

That's what actually causes people to buy the bigger homes, and the nicer cars, and the bigger TVs. The old way becomes normal, and they start to want more.

But now imagine trying to step backward to save some money. Folks do it all the time. Sometimes they do it because they’ve just had enough of the debt they’re in. They get fed up. For them, getting out of debt is more important than a nicer car.

Some things can happen in our lives that force us to rein in this lifestyle inflation and even to set it in reverse. I did that with my car. Even though we loved the Acura, we sold it. The money became more important than the car.

It made sense at the time, but it was hard to do. So understanding that lifestyle inflation is a factor, and that it’s hard to reverse can keep you from making bad decisions in the first place.

4. Stop Comparing

Hedonic adaptation can also teach us to stop comparing our lives to others. We talk about this concept of comparison in personal finance a lot. Your neighbor pulls into the driveway with a nice car, and you think, "I wish I had that car." They start renovating the kitchen or going on expensive vacations, and it's hard not to compare.

One of the worst culprits here is Facebook. We all have friends who are always posting on Facebook. Every time they show pictures, it's of something good - their vacation or home renovation. Their lives seem to be perfect because that's what they're portraying on Facebook. In that regard, Facebook can be a real bummer.

When you catch yourself comparing what you have to others, put a stop to it immediately.

5. Understand Your Own Values

So far we've talked about avoiding lifestyle inflation and always wanting more. That's the negative side of hedonic adaptation. But there's a positive side here, too--understand what's most important to you, and make decisions based on that priority.

When I was preparing to talk about this, I thought about what's most important to me. I came up with four things: my family, our health, my time, and my faith. Those are the four most important things to me, and none of them has much to do with money.

If you make a list of what's most important to you and then make financial decisions based on that list, it's easier to avoid lifestyle inflation. When you can avoid spending money on things that don't bring lasting happiness, you have more to spend on the things that do bring lasting happiness.

But you can't know how to spend your money to bring lasting happiness until you know what that looks like for you. Your list may look different from mine. But you should have your own list of your most important values. Then, make financial decisions that line up with that list of values.

6. Focus on Simplicity

One general rule of thumb I use to make decisions - whether it's about buying something or not - is that if we focus on simplicity, we usually go down the right path.

A smaller house is simpler than a bigger one. It’s less expensive to buy and maintain. One car is much simpler than two. A clutter-free house is much simpler than lots of stuff. The bottom line is that if you’re about to make a choice - financial or otherwise - think about the simplicity or complexity of whatever you’re confronting.

Hedonic adaptation is part of the human experience. It can lead to a series of bad decisions as we seek happiness. It doesn’t have to. Just being aware of this fact in your own life can help you focus on what truly brings you happiness.

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