The income and consumption illusion – Part 1: More and more will NOT make you happier!

Ever increasing happiness by ever increasing income and consumption is as much an illusion as this one…

One of the most stunning findings of happiness economics is the effect of adaptation.

It basically says, that from a certain point on you will quickly adapt to

(a)    Changes in your income/wealth

(b)   The possession of new stuff

Basically, common sense should already have told you that this effect is at work, but the credit of happiness economics is that this effect was statistically verified and even quantified by extensive field studies and experiments (check this post for more and for sources).

A change in income or wealth does actually lead to a measurable short-term boost in happiness, and probably no one would deny that.
The interesting thing is that this boost is of short living nature. The higher level of happiness begins to wear off after 3-6 months already, and latest one year after the rise you will be down on your old level of happiness again (ceteris paribus, i.e. other factors assumed to be constant). Latest after that year you will complain about the same things as before, i.e. you will think “I’d deserve another rise”, “I should get more honored for my work”, “this job sucks, if it only would pay better”, “if I only had more money than I could do or buy this and that” or whatever.
The average person will also have adapted his/her spending level by that time, and gotten used to higher consumption, without feeling any better after one year.

This is a stunning fact as it clearly shows that climbing up will probably not boost your happiness.

Buying new stuff suffers from the same effect.

If you buy a new car, it WILL give you a momentarily boost of happiness. You WILL feel very great the first few weeks and you WILL fight with your partner who is driving the first few trips.
You will still feel good the next few months, but latest after a year – poof – the wellbeing is gone, and what you have is just another car.
You will be annoyed as before by commuting or by traffic jams, and your still quite new car will not help you there. But the money will still be gone.

That means that both income increases and new possessions work basically like some sort of drugs.

They provide a good feeling initially, but the feeling wears off quickly and has to be replaced by a new dose. And over time it is quite likely that the dose has to ever increase.

Example:

As a student, buying an old junker for 1000 EUR might give you your first (and possibly biggest) boost of possession happiness at low costs. Later you will want a newer car, and if you follow that road blindly (and assumed you could afford it) you will later want a really big car, even later a shiny SUV and then an own boat, a larger yacht and so on.

This is exactly what you can observe with new-rich people (who don’t have a plan or control over their money): They follow the addict’s way to ever more consumption, in the vain attempt to repeat the kick of the first dose – the rusty old junker they bought with their first few bucks when they were young).

What’s the implication of this findings for downshifters?

I think this effect is at the very heart of the rat-race.

Basically it is one of the major force DRIVING the rat-race (one of the other being status thinking), forcing you to work more and more, earn more and more, spend more and more, just trying to keep a level of happiness you already had before all of this stress.

Implication is clear:

Observe yourself very careful.

Check how the happiness boost melts away after you bought something. Try to keep that in mind in future buying decisions. Understand that the road to happiness via getting rich or consuming more is a false one.

That consumption beyond basic needs actually is a drug and first step is to get detoxification.

OK then, so we should all be beggars, earn nothing and consume nothing? Live in the woods or what?!

Well, hold a second.

If you read carefully, income boost will not add permanent happiness BEYOND A CERTAIN THRESHOLD.
That is, for the optimal happiness/downshifting mix, your material well-being should exactly reach that threshold and then stop right there. From then on you should convert any additional progress in your job to more free time via less working hours.

Difficulty sure is to find this threshold.
In the articles mentioned on the other post, you will find figures around 35-50.000 USD (28-40.000 EUR) household net income per year. Whatever they mean exactly by household (I’d interpret this as more than 1 person, thus a single should actually need less). I think, in a western economy this is reachable.

However, I’d suggest not to stick too much to this figure, but to find out the level you are confident with for yourself. I think this could be a quite individual level, depending also on your peer-group (see this post), and the general price level in your area.

To find out and to actually stop the rat-race is a challenge, as you will be likely to be addicted quite a bit already by then. But if you closely and honestly monitor yourself, you will find out if the adaptation effect affects you already:
If you are starting to crave for increasingly expensive and unnecessary stuff that produces very limited additional benefit (like expensive automatic watches, fancy aluminum tires and that sort of crap), then your personal level of sufficient material wellbeing is likely to be reached and you are starting to suffer from the more-is-better-illusion.

I admit, Woodpecker suffered from the same illusion for some time in his life. Yes, I bought an incredibly overpriced watch for 1000 EUR once, thinking “Well, that’s expensive, but it’s quality craftmanship and I will wear it for a lifetime.” Bullshit. I spent money on dozens of other totally unnecessary purchases, even the mentioned set of aluminum wheel rim. I thought: “Well, I need that to make the car complete”, or: “I owe that to myself for all the stress I have at work, that’s my reward now”. Advertisement will tell you the same, but it still is what it is: Double bullshit 😉 )

Now the challenge is to accept you reached the plateau.

Accept, that by earning more your happiness will not increase.
You now have to stop the rat race and accept that you have to find other ways to improve your happiness.

But don’t worry, there are infinite possibilities beyond materialism and consumption.

Go ahead and find out!

Cheers,

Woodpecker

…Next post will continue on this issue and discuss why we should possess anything at all if all the benefit of possession wears off so quickly. I’ll put forward an interesting thought that crossed my mind recently.

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4 comments on “The income and consumption illusion – Part 1: More and more will NOT make you happier!

  1. Interesting.

    One sudden thought: imagine you first have ten hours “free time” per week (after work, chores, sleep). Then you do something and now you have twenty. Wow! Excellent! Happiness boost. But you probably adapt to that, 20 hours of freedom per week becomes normal. So after a while you want 25 hours of free time every week. It makes you happy for a short while, but then you want more free time again.

    Wouldn’t you get used to the luxury of having free hours like you would get used to the luxury of having money (and items you bought with that money)?

    I’m just curious.

    • mrwoodpecker says:

      Excellent question. And not an easy one I have to admit.

      I guess it very much depends on what you do with that freed up time.
      The big benefit of time is that you can convert it into things that produce a constant boost in happiness and that don’t wear off, mainly social activities/improving your social network, activities where you have full control, better health, or more excercise. All of this will rise your level of happiness permanently, but these things obviously also need an ongoing amount of time to maintain.

      Having said this, the law of “decreasing marginal return” might still apply:
      While the jump from 10 to 20 hours free time might feel great, the jump from 100 to 110 might not make that big a change.
      That’s actually why I prefere the concept of Downshifting over the concept of Extreme early retirement. (see here)

      Not that I would have a problem with not working anymore at all, but I think a certain level of income is helpful. It does not have to be great, but probably above what I (or most others) could produce sustainably by Extreme early retirement.

      And then the value of money increases the less you earn, so each dollar less earned from working less will be a bit more painful than the dollar foregone before.

      In economic terms you should find the point were the lost utitity out of the wage of an extra hour equals the utility you’d have if you’d spend that hour for something else.

      Problem IMHO is that most people lock in way above that point (too much income that they spend foolishly, too little free time and thus too much stress).

      Cheers,
      Woodpecker

  2. […] indicated I would like to continue the discussion from this post on the optimal level of spending and […]

  3. […] adaptation to new possessions is so quick that the happiness boost wear of quickly. Memories of nice events or […]

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