The Dangers of Hedonic Adoption to Your Personal Finances

I’ve been part of the initial Ondeck Investor Fellowship and it’s been really educational. One of the big pieces of managing investments is dealing with your own psychology or instincts wired into your lizard brain from thousands of years ago on the plains. One of these is Hedonic Adoption & Novelty effect. And boy do I suffer from these. 

Looking back, I was very fortunate to land at Yahoo! during its rise. I got to travel the world, learned a ton, and met amazing people. I was also paid very well, got to expense almost everything and got stock options that were worth quite a lot. You would think I was able to put away much of this. But I got caught up with lifestyle creep. The more I made, the more I spent. Holidays became more frequent and expensive. I pretty much bought whatever I wanted. 

So I use the example of chocolate. You start off enjoying Hersheys, but then you discover Ghirardellis. It’s a bit more expensive but you love it the first time. After you have it a few more times, you get used to it and you hanker for something new. You upgrade to the more expensive See’s or Godivas but that soon gets old. So then on to Dandelion Chocolate or La Maison Du Chocolat which btw both are absolutely divine. Also crazy expensive. I think you get the point. You keep raising the bar and spending more. It’s a never ending cycle.

This is why they call it “Hedonic Adoption”,  the “Hedonic Treadmill.” There is an initial rush of joy or pleasure but you quickly return to your previous sense of happiness. 

It’s incredibly easy to get caught up in this trap. Especially in an advertising-driven materialistic & capitalist driven society like America. I even remember an Idiotic American President from the early 2000s encouraging people that spending was patriotic. The American economy is literally the world’s consumption engine where we are taught that you are what you buy. As Will Rogers once said “Too many people spend money they haven't earned to buy things they don't want to impress people they don't like.” We are in a society where flexing is driving around an expensive sports car to show people how successful you are.

And this is broadcast all across the world in media and social media so this is becoming more widespread. 

So how do you beat this? It’s taken me almost 2 decades and a lot of personal re-programming. 

  1. I follow the very basic rule of “Paying myself first”, having money automatically deducted before I even see it. 

  2. I automate and Dollar Cost Average (DCA) most of my investments 

  3. I’ve re-wired myself to enjoy investing, when i feel like getting something, i will first look at investing a small amount of money which usually gives me dopamine rush i normally get from buying something 

  4. I write down every expenditure I make and I review it every week to make sure I am not overspending. Not writing down and tracking expenses for over a decade nearly wrecked my finances. I literally had no idea what my spending levels were (it was very high btw) and what I was spending money on. 

To think of all the money I wasted. But you can’t have any regrets and it’s part of the learning process. And it’s never too late to fix. 

The biggest driver of managing and controlling your impulses is having a bigger goal or mission. For me, it’s financial freedom. I’m never going to be beholden or dependent on any one person, any company or any country ever again. That was the big lesson from 2020.