When we hear a word or phrase that defines a concept we recognize but never knew the word for, that’s a good day. Then, when the word sounds incredibly smart and you can already hear yourself throwing it out casually to show off to your friends, that’s a great day. Here's to a great day, introducing Hedonic Adaptation (also known as the Hedonic Treadmill). Hedonic Adaptation is a concept that states positive or negative changes in our lives only provide a temporary variance from our general state of happiness, and after that temporary variance we eventually revert back to our happiness equilibrium.
The best illustration of this is surveying the happiness levels of someone who has had a life changing medical accident (such as a paraplegic) vs. someone who has just won the lottery, shortly after the event and then again a couple of years after the event. Their level of happiness prior to the event represents their baseline, their happiness immediately after the life changing (positive or negative) event is typically exactly as we would expect, but the interesting data comes in the years after the life-changing event. Numerous studies show that people actually revert to their baseline level of happiness despite devastating medical diagnosis or incomprehensible lottery winnings.
So, what does this tell us about our financial lives? It says everything! That new car you bought will only provide a temporary spike in happiness, however, once we jump back on that hedonic treadmill, our happiness level will (in most cases) return to its prior baseline. In our debt laden society, that new car payment will be around much much longer than the happiness that it provides.
This theory holds for many of the day-to-day purchases and consumer goods that keep most Americans from reaching financial independence. Even if you pay cash for that fancy new car, your long-term wealth building will be negatively impacted much longer than the car will keep you smiling down the road.
In our initial meeting we may have discussed the adaptability of humans (one of my favorite subjects). Few species are as proficient at adapting to their surroundings as humans, but for all the benefits it provides, from a financial standpoint it creates a situation where we’re constantly chasing happiness through spending. That same adaptability that helps the newly widowed mother push forward and provide her for family, also inclines us to reset our baseline of happiness with each new purchase, ultimately not actually progressing anywhere (hence, the treadmill). We spend a small fortune remodeling and updating our home, only for that to become our new baseline as we adapt to the new level of comfort. Much sooner than we would suspect, the joy associated with that large purchase has faded. So, if this is the case, is there really any purpose to spend money on anything that isn’t a necessity? Arguably yes, in my mind, there are really two core things that money can provide: 1) security and 2) time freedom. Typically, if we make a purchase because we think it will make us happy, we are wrong. If however, we spend that same amount of money to hire a virtual assistant which frees up 5 more hours per week that we get to spend with our children, friends, or other loved ones, that is money very well spent. Or, if just having that money in the bank helps create a sense of security from the next economic downturn or job loss, that is comfort that will persist.
So, I challenge you, the next time a "luxury" purchase is about to make enter your cart ask yourself what value/happiness it will provide. Then, really ask yourself if the value/happiness with outlast the financial implications.