$ = $ = $ = $ = $ = $ = $ = $ = $ = $ = $ = $ Intentional Investing Newsletter March, 2005 $ = $ = $ = $ = $ = $ = $ = $ = $ = $ = $ = $ IN THIS ISSUE: 1. Note from Your Editor, Lynne 2. Article: Choice, Adaptation & Disappointment 3. Resource Spotlight: Two Books on Special Topics of Love and Money ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ -=- Note from Lynne -=- Dear Reader, I just came back from a long walk, enjoying the early signs of Spring. I love this time of year, full of new possibilities. This issue features our last article in the series on Money, Happiness and Choice. Entitled "Choice, Adaptation and Disappointment," it addresses the impact of getting used to things (ie, adaptation) on personal satisfaction with our choices. It is with mixed feelings that I announce that this will be the next-to-last issue of Intentional Investing -- at least for the near future. While this decision feels "right," I also feel sad that I won't be having this monthly connection with you. Enjoy the article, and look for your last issue of Intentional Investing next month! Warmly, Lynne ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ Lynne Hornyak, Ph.D., Editor e-mail: Lynne@LMHServices.com Coaching successful professionals to greater financial freedom and well-being. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ -=- Feature Article: Choice, Adaptation and Disappointment -=- Remember the excitement of getting your first car? First paycheck? First home? For many of us, those were pretty "heady" experiences. How long did your pleasure last - years? Months? Or more like weeks or days? If your pleasure faded, that's normal. It's a process called adaptation. Adaptation, like most psychological processes, have an up-side and a down-side. Adaptation is a good thing particularly when you're in misery. If you lost your wallet or missed out on a fantastic buy, you probably won't feel as bummed within a few days, weeks or months as you did when you first found out. But we human beings also adapt to pleasure and satisfaction. This process can have a significant impact on our relationship with money. In this article, Barry Schwartz' (2004) research on choice, adaptation, and subjective well-being is applied to financial choices and satisfaction. The Impact of Adaptation on Financial Satisfaction When we get used to things, we start to take them for granted. For example, in the not-too-distant past, all we had were "land-line" telephones. Then the cell phone was invented. At first it was a novelty. We felt cool being able to contact and be contacted by anyone no matter where we were. We felt liberated, even though the "footprint" had limits. Now, it seems that everyone has a cell phone. And our expectations have grown as well - that we should have clear connections even in the subway, that there should be no roaming charges regardless of where we are calling from, that we shouldn't lose connectivity. Enhanced features not only mean enhanced choices. They also are accompanied by increased expectations and, frequently, reduced or short-lived satisfaction. And that goes for more than cell phones. From this common example, let's extract several facts about adaptation that have implications for our financial lives. 1. Hedonic adaptation Schwartz poses that we each have a "pleasure thermometer" that ranges from negative through neutral through pleasant. When we experience something good, it goes up and when we experience something bad it goes down. However, we adapt. So, let's say that you bought one of the first cell phones on the market. And your "pleasure temperature" rose 50 degrees. However, the next time you bought one, your temperature only rose to 40, then 30 then 10 with the next ones. You adapted to the pleasure. The novelty wore off, which is one way that adaptation works. Another way that adaptation works is when we get a new standard. Back to the cell phone example, cell phones evolved to include cameras, email access and other great gadgets. Now your basic cell phone seems primitive. You have a new standard. Ordinary or usual pleasures seem tame or boring by comparison. 2. Hedonic treadmill Some people may respond to hedonic adaptation by giving less value to material things, like cell phones. However, most people are driven to pursue novelty - "bigger, better toys." However, there is a trap. Eventually, the new goods also lose their pleasure intensity, and people get caught up in the chase to seek pleasure or ward off disappointment. Philip Brickman and Donald Campbell coined the term "hedonic treadmill" to describe this trap. Many people get stuck on the treadmill, pursuing bigger pleasures, looking for the perfect item. But it doesn't matter how fast they walk or run - there is no solution in that approach. The impact of the hedonic treadmill on financial behavior can be huge. We see many examples around us and perhaps in our own life of just "having to have" the latest model car or SUV, computer, home theater equipment, designer clothes to feel excited or satisfied. In the investment arena, it can lead to making riskier investments to get the (potential) thrill of a big return. 3. Satisfaction treadmill Not only do we adapt to certain material levels, Daniel Kahneman points out that we also adapt to particular levels of satisfaction. Say that your pleasure thermometer gets into the pleasure range at 30 degrees. You feel pretty good when you keep your temperature there at 30. But, adaptation rears its head in the subjective area too. Eventually 30 degrees doesn't feel that great anymore. You need 40 degrees to feel that good sense of pleasure. Then you adapt to that, and so on. So, for example, you felt pretty good investing in mutual funds, making decent returns. Over time, you don't get the same pleasure. So you move on to stocks. Then, stocks become neutral and you look around for "bigger challenges" - hedge funds, day trading. What happens over time? More risk, less satisfaction. 4. We fail to anticipate adaptation. Studies show that people typically overestimate how they will feel in the future, or underestimate adaptation. It's as if the way it feels now will be the way it feels forever. Schwartz points out that almost every decision in our life from who we marry to where we move or what job we take involves some level of prediction. So, there can be serious consequences for making choices if you fail to anticipate adaptation. Perhaps that's why some of us have trouble making sacrifices in the moment - such as putting money monthly into your retirement plan rather than spending it on something you'd like to have now. You feel deprivation in the moment. And you don't anticipate that the desire for that extra pair of shoes or handsome watch will fade within a few days or weeks. 5. Choice exacerbates the problem of adaptation. When we have more options, we typically invest more time and effort in making our decision. There are more opportunity costs to consider, and the likelihood of greater regret for making a less- than-perfect choice. Schwartz refers to time, effort, opportunity costs and regret as "fixed costs" that we pay up front when making choices. These costs get "amortized" based on how long you feel pleasure or satisfaction from your choice. For example, if you feel satisfied with your new car for years, then the upfront costs aren't as significant (ie., get amortized over a longer period of time) than if your pleasure wears off in a month. If your pleasure wears off quickly, you are more likely to feel disappointed or dissatisfied. And, as we noted earlier, dissatisfaction can trigger the hedonic treadmill. 6. Adaptation affects maximizers more than satisficers. Maximizers are individuals who seek and accept only the best. (Satisficers seek "good enough.") Consequently, maximizers invest a lot of time and effort into their decisions. And, as a consequence, they have higher "upfront costs." As we invest more time and effort in a choice, we are also more likely to expect enjoyment or satisfaction. As the result of adaptation, maximizers are more likely to feel disappointed because they've invested a lot, expect a lot and, contrary to expectation, their pleasure fades as they get used to their choice. What Can We Do about the Down-side of Adaptation? Schwartz points out two paths for dealing with the down-side of adaptation. First, be aware that adaptation happens. You're less likely to feel disappointed with your choice if you realize that the pleasure of any positive event - a purchase, an investment - fades over time. Second, control your expectations. If you expect more satisfaction because you've put a lot of time and effort into your choice, then limit the number of options you consider so that you invest less time and effort up front. Please note that we're not advocating mediocrity. Rather, choose your top 3 options and invest time and effort pursuing them. Along another line, our expectations of control have increased over the years as we have greater freedom of choice in our culture. So, take some time to examine the expectations you have of yourself and your ability to control situations and experiences. Letting go can be a good thing! Adaptation happens. Be aware. Accept that it is a human process. And anticipate that adaptation affects your assessment of satisfaction. There is freedom in awareness. Reference The Paradox of Choice: Why More is Less," by Barry Schwartz (2004). New York: HarperCollins Publishers Inc. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ -=- Resource Spotlight: Two Books on Special Topics of Love and Money -=- Children and Wealth If you are concerned about the impact of prosperity on your children's well-being, then Gary Buffone's Choking on the Silver Spoon: Keeping your Kids Healthy, Wealthy, and Wise" is a must-read. Dr. Buffone's book is both informative and practical He describes how wealth can cripple children's emotional development, and provides a self-test to help you assess if your child is a "silver spooner." He explains how parents' best intentions can have unintended consequences, and identifies a number of best intentions. You can easily use these descriptions to self-assess yourself. Dr. Buffone then shares his program, The Five Immutable Laws of Financial Parenting. The program provides clear, practical advise to guide your parenting efforts. Dr. Buffone also includes additional chapters that target financial parenting for different ages: from 3-12, adolescence, young adults as well as middle-aged adult children. Couples and Money Based on his popular column in the Wall Street Journal Sunday, Jeff Opdyke has collected twenty powerful chapters into "Love & Money: A Life Guide for Financial Success." Rather than being another book on personal finances, Opdyke dives into what's deeply personal about money within our closest relationships. Opdyke takes a strong stance, which I applaude, that money problems aren't responsible for ruining relationships; our inability to talk about the problems is. He covers topics ranging from the formative years of a relationship -- looking at budgets, debt, spending and saving; hot couples' topics -- financial compatibility, merging finances, surreptitious spending, money and power; handling money with your kids; financial issues that arise in mid life; and planning for your later years. Opdyke's style is personal. He shares issues and situations from his own marriage, so you feel he "really gets it" emotionally. He also offers sound practical strategies to deal with the issues. It's a book that I'll come back to time and again. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ If you are interested in coaching, contact me for a free half-hour consultation at Lynne@LMHServices.com. or (202) 387-5923. Please include your name, e-mail address, phone number and brief description of your interest in being coached ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ Have you been to the Intentional Investing webpage lately? Go to www.lmhservices.com and click on "Changing your Relationship to Money." On the Intentional Investing webpage, you can take a self-quiz on Your Relationship to Money, participate in a survey on gender and money, access articles written by Lynne as well read previous editions of this newsletter! ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ PLEASE NOTE: Intentional Investing [TM] is intended for informational and educational purposes only. It is not a substitute for financial, legal, accounting, psychotherapeutic, or other professional advice and consultation. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ Copyright 2000-2005 Lynne Hornyak. All rights reserved. The above material is copyrighted but you may retransmit or distribute it to whomever you wish as long as not a single word is changed, added or deleted, including the contact information. However, you may not copy it to a website without my permission. Reprint permission will be freely granted upon request. Advance written permission must be obtained for any reprinting of this material in modified or altered form. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ $=$ CONTACT INFORMATION $=$ Lynne Hornyak, Ph.D. LMH Services Coaching and Consulting 3818 Klingle Place, NW Washington, DC 20016 Phone: (202) 387-5923 Fax: (202) 244-3373 e-mail: Lynne@LMHServices.com Web: www.LMHServices.com