Chasing Happy: Hedonic Adaptation and Financial Wisdom

Understanding Hedonic Adaptation in Behavioral Finance with Dr. Bryan Foltice

Welcome to the Bryan Foltice Behavioral Finance Podcast! In this episode, Dr. Bryan Foltice dives deep into the concept of hedonic adaptation, also known as the hedonic treadmill. Dr. Foltice shares his personal journey, transitioning from the corporate world to academia, and illustrates how we often adapt to both positive and negative life events. He further discusses the impact of this adaptation on financial decisions, the pitfalls of lifestyle inflation, and the importance of aligning financial goals with personal values. Learn practical advice on practicing gratitude, spending on experiences, and aligning your finances with life goals for long-term happiness. Tune in for an insightful discussion on making smarter, more informed financial decisions.

00:00 Introduction to the Podcast
01:33 Understanding Hedonic Adaptation
02:14 Personal Journey: From Investment Banking to Academia
07:13 Achieving Tenure: The Emotional Rollercoaster
14:08 Hedonic Adaptation in Financial Decisions
19:51 Strategies to Overcome Hedonic Adaptation
24:02 Aligning Financial Goals with Life Purpose
26:17 Conclusion and Final Thoughts

Transcript

0:04

Welcome to the Brian Foltis Behavioral Finance Podcast, where we unravel the mysteries of behavioral finance and unlock the secrets to making smarter, more informed decisions with your money. Now, here's your host, Dr. Brian Foltis. Hello and welcome to the Brian Foltis Behavioral Finance Podcast. My name is Brian Foltis, and today we are going to unpack what is called Hedonic adaptation or what we know as the hedonic treadmill. So thank you very much for listening today. If you are liking what you're hearing from the podcast, please make sure you like and subscribe so you never miss another episode. Also tell a friend that's how we spread the word and by leaving. Nice kind reviews. It also opens up the door for new ears to listen to this podcast. So thanks everybody. Wherever you are. I am very pleased to see the growth and the spreading of the downloads that I'm seeing here for this podcast. So thank you very much. Even if I don't hear from you. But if you do have any comments, I would love to hear from you. You can find me at brianfoltis. com, B R Y A N F O L T I C E. com, or you can find me on Instagram or YouTube. I've got content out there for you as well. So today we are going to be looking at this hedonic adaptation. So this Hedonic adaptation or hedonic treadmill. We're going to use those terms interchangeably. It's our tendency to return to a stable level of happiness after experiencing positive or negative changes in our life. Something really good happens to you. That's good. but very quickly we adapt and it changes. Similarly, if something really negative happens to you, yes, it's bad, but then we also adapt to this. And so whenever I think about, we're going to talk about behavioral finance, how that works, but In my everyday life, I always think about this hedonic adaptation and I'll never forget the day that I got tenured to become a tenured finance professor and All the way back to, we gotta go back now to 2009 or 10, 2009 or 10, when I decided to leave my job at an investment bank and was working as the manager of basically the settlements team for derivatives at a large investment bank and. Hey, I'm going to pick up, get back in shape. I'm going to sell all of my personal belongings. Everything that my ex wife and I had at the time, we're able to pack up into a small minivan and we're going to sell everything else, drive up, put it in storage and move ourselves, our 13 month old son and our dog over to Germany. To do the PhD program and to play basketball at the same time. So we sold everything moved over and lived in Germany for five years trying to get the PhD and the idea or the ultimate goal that I had in mind was I had a pretty strong sense that I did not after the PhD want to go back into investment banking. I didn't get a lot of purpose out of there. It was a bit soul sucking for me, although it's. I know some people like it. They get a lot of purpose from it. Like I said, just wasn't not for me. I wanted to have more of a direct impact, even if that meant taking a little bit less pay. Nevertheless, five years going, living in a foreign country, going through the ups and downs of what that live is like living as a foreigner in a foreign land where you're not definitely speaking your mother language and all of that in order to get to this point where I said, man. Wouldn't it be awesome? My goal is to get a good job as a tenured, or to get on a tenured track field for a finance professor. And man, if I could just get tenured and In this job, then I have job security for the rest of my life and I would have to do something really crazy in order to get fired. So this whole goal that I had in mind had this whole job security and all this great stuff in mind. And so I were working for this and there were days where it's like, Oh man, this is. Very uncertain and even as I was working through my doctorate to try to get publications and go through that process in order to get the doctorate was basically uncertain all the way to the last day. Just making sure you're finally and finally walking away from Germany with what I came here to do. And that was. Getting my PhD, having my doctorate, and walking away with those letters before my name. Doctor. I always say I don't give a shit what you call me. But if you happen to call me doctor, it's man, I worked my ass off for that thing. It wasn't something that my, my dissertation chair just gave to me just for completing a little, program or something like that. I basically worked. As a researcher and teacher at that university in order to get that, basically my dissertation was, I could basically get tenured from that dissertation. That's a fucking hard. It was in order to get that doctorate in Germany and to do it in a foreign land where I have to update my visa every year and prove my existence and have that uncertainty. All the way to the end was just a lot. And so I always felt I walk a little bit taller after that experience. Because we made it through, but it wasn't without its challenges. And man, we really fought for that. And some, there are some programs where you can go through, do your little three year program, and you'll, somebody will just, rubber stamp your doctorate. That was not the program that I was in, friends. I was in a hardcore research school doing some interesting work with some, Absolutely brilliant people, and I made it. I got to the other side. So now, the next step. I've got five to six years. Six years is usually the timetable in order to get tenured. And so now I found myself at Butler. We went through all of that interview process to get to Butler. And there we go. We're at Butler University in Indianapolis, Indiana. Love that school. And now, what do we do to get tenured? Alright, don't do anything stupid, Brian. Come on. I bring it every day. Don't do anything stupid, and you go through this process, and we, at Butler, we do a two year review and a four year review, and at that four year review, was getting some really good signals from those around me in the business school saying, hey, you might, You can think about going up a year early if you want to, and it's looking like your stuff is looking really good. You're doing awesome in the classroom. Your research is great. Your service is on its way. Like you can, green light to do this. So I thought certainly, that gives me one less year to do something stupid, and I've got all my ducks in a row, I'm going to do this. So I put my tenure up in my fifth year, and go through this process. Now the process, even if you put the most rock solid dossier together. So we call it the dossier. For me, it was almost two binders worth that were probably about three to four inches thick. So think monster binders. I was the last person to do the paper based version of the dossier. I told my whole life story literally in paper version. It was two binders, four inches almost for each. And then you submit that on October 1st and then you wait and it goes through all the different channels and you still don't know. if you're tenured. Don't know if you're tenured and you get some levels go, Oh, I passed this level. Now it's moving up to the Dean and that path. Now it's moving up to the Provost, that path. But every single time it's under scrutiny for this procedure. And then if all goes well, you finally get, it got signed off. At the board of directors level they're the final level to take a look at it. They're more or less signing off. If it's all green lit up until then sign off on it. And then you get that email that says, congratulations, you've been 10 or actually, I'm sorry, I take that back. I didn't get an email. I said it was me and another guy. Who is going through the same process. And now this is April of 2020 when this happened. So we are in lockdown for COVID and I get an email from the acting director at the time acting Dean who said can you guys jump on a quick call at eight 30? I think you're going to like what. I have to tell you. So of course we're like, yes, this is it. 830 we jump on this call and we get the news, everything we've been working for now for 11 or actually 10 years. So five years in Germany. Five years at Butler, everything I've been working for finally pays off. And I get the call says, congratulations, you've been promoted to associate professor and are now tenured. I said, Oh, great. Thank you very much. Thank you. And then it was a very short conversation. And as we were wrapping up, this was now at 837, 837. We got done with that phone call. It was a seven minute phone call. I'll never forget it. And I asked the question as we were jumping off that call. I said, do at least we get a piece of paper or a certificate saying, what we accomplished? And the dean said no, we don't really have anything like that. She said you can go and update your email signature. I said, okay. So I updated my email signature. And then. That was it. By 8. 45, I got a shit pile of an email that I had to put out, fire, and I had to put out at 8. 45, and I was right back to where I was before, right before that news came shoveling the same shit. And I thought, what is this? Now friends, I have a long story, but painting this picture of hedonic adaptation where you get this great news, but then all of a sudden reality strikes and you go right back to where you were. And so think about it in your life. You've had that big moment and it happens and then you walk away and go, Oh, that was it. I went, I was so excited for this. And when it happens now, all of a sudden. It's gone, I don't have any, what's left? What's very common In academia is what I've gone through is you have this and then you get it and it's very underwhelming and then you have almost this existential crisis. Of course, this existential crisis for me in 2020 coincided not only with. but also going through a divorce and all the transactions that come with it. And it was literally like, okay, I got this now from a career standpoint, what am I, what's left? What am I doing? I have the security, but now there's really not much left to do. So how do I get motivated to. do more research or to do a good job or not do anything stupid like all these things and realize that this is our tendency after something good happens to just reset and adapt had the same thing with Always look forward to my summer paychecks. You see that and you're like, Oh, I can't wait till that day because then I get an extra paycheck for my summer work in addition to my regular salary. And I always realize once that number hits, it's such a fleeting feeling where it's good and then you go right back to where you were. And nothing really changes. And so I'd like you to think about that. What that looks like in your life. And we're going to have to talk about now, how do we, if this is actually happening, how can we make something good out of this? Or how can we do good decisions, especially when it comes to finances. Okay. So let's bring hedonic adaptation into the world of finance here. So once again, you get a raise, you get a bonus. This feels awesome. It's great, but it's very fleeting. So that's my experience too. That extra money it's that feeling that you see when you see basically on a computer screen is very fleeting and then. We also have, after this, we also have spending habits that can creep up. Now we're going to, this is our lifestyle creep or our lifestyle inflation that can come with it. So if you get that extra paycheck, you go, hey, I'm going to, if I have this bigger house or if I have this nicer car, then I'm going to be happy. And then you get that bigger house, you get that bigger car and you feel very underwhelmed by it. And so perhaps you double down and you chase a bigger house or a bigger car, a nicer car from that. This is our hedonic treadmill that we're following and it leads to unhappiness, dissatisfaction and some cases this is what can lead people into overspending. high amounts of debt, which causes high amounts of stress. So the opposite of wellness, the opposite of happy is what happens when we're running on this hedonic treadmill. Another example here of this hedonic adaptation we've seen with lottery winners. Once again, they get this lottery winner and then their lifestyle. it and they find themselves very unhappy. So this reminds me of the quote, I'm going to quote Michael Brady from the old school Brady bunch. It says, wherever you go, there you are. And now this is starting to move a little prelude into the bigger picture here. So if you are happy with a small house, you're going to be happy with a big house. If you are unhappy with a Big house, you're gonna, or a small house, you, wherever you go, there you are going to be unhappy in that bigger house. And that house size or that car is not going to make you satisfied or happy. I've seen this with people who have highly stressful jobs. They think that they are going to give themselves some relief. around their stress by buying something. And so they, or maybe they're working a lot. I've seen this with some law enforcement agents and different service people who are working extra hours to make extra money. But because of that, they are also missing their family and their family time. So in order to compensate for that, They will buy extra shit for them and hopefully that appeases them. But once again, that just, they adapt, the happiness level adapts and the issues remain persistent. But when we talk about that, but what about on the flip side here? What if something bad happens to you? So if you have this negative setback, and this is where I think we often, we overlook this, but. If something bad happens, we also adapt. So that's good news. We will reset, we'll recenter. You get a pay cut, you get a job loss. We will survive, we will adapt. Now, of course, when this negative thing happens, we have what is called the negativity bias, which means we will recall that negative event four times is more than we will any positive events, but nevertheless, when that happens, We resettle our reference point and we adapt. So we're going to talk about here. Some of the dangers, if we are constantly seeking these financial upgrades. So whether that be income through higher salaries, we're going to work more, work harder in order to get that bigger salary, or if it's on a spending side to get that bigger house or the fancier items. Remember if that's all we are doing, once we get there. It is going to be a very short amount of satisfaction and it's going to be fleeting and we're going to have to reset the goalposts. The goalposts always reset. So whether you're trying to become a multi millionaire, once you get to that multi millionaire standpoint or area, once you get there, what do you think is going to happen? You're going to be totally satisfied? No. You're going to get off that seven minute Zoom call like I did. And you're going to need that next goal, or you're just going to fall into this existential crisis until you figure out what your next goal is. This is where this chasing of money can be more problematic than we often think. And along those lines, when, if we're having that spending problem, trying to find the short term things. And then this is where we're going to differentiate between things and experiences here. We're just trying to spend things on things in order to give ourselves that happiness. Meanwhile, we might want to consider this long term. Financial security compared to the short term pleasures, what each one can give. And so now we're going to start to work on the overcoming process, trying to tie this all together and close the loop. But we first, before we do this, if we were trying to remain happy, may I offer a practice of gratitude? This is. A really important thing that I've adapted or adopted in my life. And, oh my god, it goes a long way. Now I struggle sometimes with some of these things because as a researcher in a math brain, I want to quantify this. So I want to quantify this with, gratitude, with happiness in numbers. At this point, what I can do though, is I can use my own anecdotal evidence of how I feel when I have done my gratitude practice. So for me, if I am really doing well on this, that means it is the first thing I do before I wake up and grab my phone. Think about three things that I'm grateful for. It is the last three things I think about before I go to bed. And those things set this mindset of gratitude. And again, I can't quantify this, but it increases your happiness and sets your day off on such a different note and a different level. then wake it up and grabbing your phone, which is, otherwise going to be the default. So anytime I can practice gratitude, sometimes I'll do my gratitude meditation, 10 minutes. Man, then I start really clicking around this and it suddenly increases that. That base level of happiness when you start contemplating and thinking about all the great things that you have and you're actually putting some thought into it instead of having that one moment and then letting it go and constantly searching for that happiness. You're actively finding your gratitude and your happiness because it's around you, but you have to just carve out some time and some intention around getting there. Another thing. Around our spending is let's consider spending on experiences, not things. So these are what we call experience dividends. Now buying a thing has very limited experience dividend. And sometimes if you're using it, I've noticed sometimes with the furniture, the decorations around the house. So we get to experience that can cause a little bit of a gray area, which I'm, I now I'm in favor of. But some of these things that either get put in a closet or in the garage that we don't use consider spending on experiences if you're going to spend, so the trips that constantly give us memories, give us experiences, we can come back to those and those will give us that lifetime of happiness. Which is opposed to that seven minute Zoom call, which was a one drip and then done. And sometimes that's what a thing is. You try to buy something or some clothes or in my case it's a nice pair of shoes and you think that's gonna make me happy and it gives you that dopamine burst when you pay for it. And then it goes in your closet. You might wear it a couple of times. So that's where we say, let's try to spend on experiences, not just things. Pay yourself first. This is one way we can avoid that spending trap. If we have that new money, make sure it has a name and a place to go. And is going to help you achieve your financial goals instead of getting if you don't have that set in place and this kind of goes to what we said before or what we try to do with our financial plan is pay yourself first, set it up automatically. So it goes. So not only do you have to, you don't have to step in and intervene, but you also get rid of the temptation to spend it on something. That money that you've designed to save is still sitting in your checking account. You just want to get that one step away from you as quickly as possible and through that automation You'll be able to get there and then finally to the bigger picture here as we're trying to set our financial goals I want us to think not just in numbers. So the numbers are helpful. That means we can quantify it. That is, a part of our SMART goals. A good way to measure, a good way to be specific around having our financial goals. But we also realize now that we know about this hedonic adaptation and the hedonic treadmill, reaching your financial goals is not going to give you long term happiness. What you might be able to do with that money when you hit your goals is something that can help you with long term happiness, whether it's saving for your future or investing to give yourself financial freedom, financial independence, create the life you want. So now all of a sudden our financial goals are aligning with something else, aligning with the experiences that we want to have. The purpose that we want to live with now, our money is in alignment with the, that purpose and those goals, those relationships, your overall health, physical, and mental. This is where it all sinks into place. And this is where I finally. I have realized in my own life that it is not about hitting a number. It is about having your finances aligned with what you want to do with your life and using them all in conjunction with each other. So if I put all my effort into just hitting a number and all my relationships go to shit, all my physical health is trash and I'm doing a job that I don't like. I'm totally miserable, but I'm hitting that number. It's not worth it. And that's where we want to take a step back and think about how can we do how can we get our financial goals to align with that purpose? With that friends, I am going to relent. So thank you very much. If you've made it this far if you have any questions or any comments, we'd love to hear from you. You can find me at BrianFoltis. com or on Instagram or YouTube. That's your best bet. Otherwise, have a wonderful day. Thank you very much. We will see you on the next episode. Thank you for tuning in to another episode of the Brian Volti Behavioral Finance Podcast. We hope you found our exploration into the fascinating world of human behavior and finance, both enlightening and thought provoking. Be sure to subscribe for future episodes and until next time, stay curious and financially savvy.