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Three Thoughts

John Lim, 12:47 pm ET

“THE UNEXAMINED LIFE is not worth living,” warned the Greek philosopher Socrates. What has my examination turned up? Here are three recent thoughts on life and how money fits in:

1. What’s measurable isn’t always meaningful. It’s easy to get tunnel vision when it comes to our personal finances. We—along with our financial advisors—tend to focus on the size of our 401(k) or our net worth, in part because these are easy to measure. I’m not saying these are unimportant metrics. They are indeed crucial indicators of financial health.

I wonder, however, whether we ought to think more about how we spend our money and the pleasure we derive from our expenditures. These are fuzzier notions but no less important. New York Times columnist Carl Richards urges us to take a few seconds before, during or after buying something to simply ponder the transaction. Without making a judgment, we should say to ourselves, “Isn’t that interesting?” The goal: Raise awareness of how we spend.

2. Wealth is subject to diminishing returns. The concept of diminishing returns is one of the more practical ideas in economics. The premise: Increasing wealth leads to increasing utility (happiness) but at a diminishing rate. A $5,000 bonus moves the happiness needle far more when we earn $50,000 than when we earn $250,000. At a certain threshold of wealth, additional income may pad our 401(k) without leading to any real change in our happiness.

Increasing our income, however, has an opportunity cost that’s measured in time and “sweat.” The irony of accruing great wealth: Those who do so often have far less time and energy to enjoy its fruits. Up until three years ago, I worked in a high-powered physician group that exemplified this tradeoff. While I was highly compensated, my job exacted a large toll in terms of time, energy and psychological well-being. One day I had an epiphany: I would likely never spend all the wealth I had attained. I had reached the point of diminishing—and perhaps zero—returns to greater wealth.

3. Hedonic adaptation is the Achilles heel of materialism. A great lie has been propagated by our culture of materialism. What lie? Having more stuff will lead to greater fulfillment. The truth is, humans are highly adaptable creatures, which can be an amazing asset. Paraplegics, for example, spend far less time in a bad mood than most people would presume.

But this adaptability is a double-edged sword. It means we also suffer from hedonic adaptation—that is, we adapt rapidly to pleasurable stimuli. We’re all familiar with this phenomenon. New retirees imagine that hitting the golf course every day will be paradise on earth, only to discover they’re bored after a few months. A child pines for a new bicycle for Christmas. By March, it sits in the garage unused.

The research on hedonic adaptation and happiness is clear. Having more stuff does not make us happier. But sharing experiences with loved ones not only brings us joy, but also fosters greater well-being. Even better, such experiences are often free or involve minimal expense.

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Jim Wasserman
Jim Wasserman
30 days ago

well-said. Our family spends more time (and enjoys more) remembering past experiences together than admiring any honorific booty (to borrow from Veblen) acquired from the experience. the greatest treasures are kept in one’s heart and memory.

Pravin Mittal
Pravin Mittal
1 month ago

Excellent article!

An
An
1 month ago

Key principles for living below your means and minimizing scope creep.

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