- It is addictive to focus on portfolio optimizations,
the next big thing that promises financial gain,
or working long hours toward a promotion.
Calling it addictive is not hyperbole.
In a 2001 study using FMRI to measure brain activity,
Hans Breiter and coauthors, including Daniel Kahneman
found that obtaining more money
activates the same regions of the brain as illicit drugs.
Maybe that doesn't sound so bad.
More money is always better than less, right?
Well, here's the problem.
From your brain's perspective,
more money is always better than whatever you have today,
even if you already have a lot of money.
Knowing that more money is addictive
and important question for every human investor
to ask themselves is how much is enough?
I would venture to say
that enough is the amount needed to fund a good life.
But to fund a good life,
we need to know what a good life looks like.
I'm Ben Felix, Portfolio Manager at PWL Capital.
In this episode of Common Sense Investing
I'm going to tell you how the pursuit of a good life
relates to your investment decisions.
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Money has the unique ability
to move economic value through time.
Money made from work done today
can be used to fund spending in the future.
Time and money are both finite resources
that we have to make allocation decisions about
on a daily basis.
There's no objectively optimal way
to allocate time and money,
but I'm going to argue that for human investors,
these decisions should be anchored
in the objective of living a good life.
So we need to know how to find a good life.
Fortunately, there is a substantial body
of academic literature on this topic.
A large portion of happiness seems to be heritable.
Meaning that in sample populations,
environmental factors fail
to completely explain differences in happiness.
Martin Seligman who's credited
with starting the field of positive psychology
suggests a basic equation for human happiness.
Happiness equals your biological set point
plus your circumstances,
plus the factors under your voluntary control.
Research and positive psychology
has suggested varying levels of contributions
from each of these items over time.
The important insight for financial decision making
is that your circumstances,
your environmental and demographic factors,
like where you live, your health, age,
education, intelligence, and gender
don't seem to matter all that much to happiness.
But your voluntary activities, how you choose to
allocate your time and money,
do allow you to exercise significant control
over your happiness.
Voluntary activities are more important
than circumstances in explaining differences in happiness.
The reason the circumstances don't seem to matter much
is that humans are incredibly adaptable.
We adapt quickly to our circumstances, both good and bad.
This doesn't mean that circumstances
should be ignored altogether.
In "The Happiness Hypothesis",
Jonathan Haidt explains that noise,
especially variable or intermittent noise,
interferes with concentration and increases stress.
So living next to a busy intersection
or otherwise noisy area may not be ideal.
Commuting, particularly in heavy traffic,
increases stress and is not easily adapted to.
And being in control or even just the feeling
of being in control increases happiness.
There's also lots of evidence documented
in John Zelensky's book, "Positive Psychology"
that living near and spending time in nature
increases happiness.
In broad terms,
there are two types of happiness,
experienced happiness,
which is best described as good feelings
and a reflective happiness or a life evaluation,
which is best described as a deeper sense
of fulfillment or being your best self.
Good feelings like pleasure and comfort
are referred to as hedonia.
For example, eating chocolate or petting a soft bunny
can be hedonic.
Hedonia contrast with eudaimonia,
which was first described by Aristotle
and is best translated to flourishing.
Hedonia is relatively easy to think about.
You know it when you feel it.
Eudaimonia takes more reflection and thought.
One way to measure eudaimonia
is using the Cantril Ladder.
Imagine a ladder with 10 steps numbered from zero to ten,
the top step represents the best possible life for you
and the bottom is the worst.
On which step of the ladder
do you feel that you are standing on.
Eudaimonia is more about living well,
while hedonia is more about feeling good.
Both Eudaimonia and hedonia are important aspects
of a happy life,
and neither are sufficient on their own.
Together they result in a wellbeing.
Martin Seligman proposed
five distinct components of wellbeing
in his five factor PERMA model.
Positive emotion, which is feeling good.
Engagement, which is flow or being absorbed
in a challenging task.
Strong, healthy relationships.
Meaning, a sense of purpose beyond yourself.
And accomplishment, achieving valued goals.
Each of these elements is pursued for its own sake
not as a means to an end,
and is defined and measured independently
of the other factors.
The PERMA model for wellbeing
highlights that a happy life
is more than experiencing pleasant feelings.
This can be a challenge for humans
because of our two speed brain.
In "Thinking Fast and Slow",
Daniel Kahneman delineates two types of thinking,
system one and system two.
System one operates automatically and quickly
with little or no effort,
and no sense of voluntary control.
System two allocates attention
to the effortful mental activities
that demand it, including complex computations.
The vast majority of our daily decisions
are carried out by our system one brains.
In "The Happiness Hypothesis",
Jonathan Haidt uses the metaphor
of an elephant, system one,
and a rider, system two.
The elephant responds to its surroundings
and acts on animalistic instinct,
including wanting to impress others
and rise in the social ranks.
The rider can think into the future, plan and learn,
but it does not have full control over the elephant.
Our elephant wants to seek pleasure,
avoid pain, and climb the social ranks.
But the other factors in the PERMA model require the rider,
who we have to consciously engage
to moderate the elephant's behavior.
The elephant seeks the kind of pleasure
that comes from eating food or winning big on a stock pick.
But the actions that satisfy the elephant
are often in conflict with flourishing.
Enjoying too much food can lead to weight gain,
and taking excessive risk picking stocks
can lead to an unnecessarily wide dispersion
of outcomes with a heavy skew toward negative ones.
The relationship between our two speed brains,
our five factor understanding of wellbeing,
and how we use our time and money is critically important
to financial decision making.
Letting the system one brain, the elephant,
determine financial priorities
may result in short term, experienced happiness
at the expense of reflective happiness.
We are willing to trade our time for money at work,
but working harder for more money
is not always an obvious trade off.
In a 2018 paper titled "Happiness Income Satiation
"and Turning Points Around the World",
Jeb, Tay, Diener, and Oishi
found using a global representative sample
of over 1.7 million people that the income satiation point
for experienced happiness is 60,000 US dollars globally.
And 65,000 US dollars in North America.
Above this level of income,
people in the sample did not experience more happiness.
Experienced unhappiness stops decreasing
at $75,000 globally, and $95,000 in North America.
For life evaluation, reflective happiness,
the satiation points are $95,000 globally
and $105,000 in North America.
The authors of the study
found in some regions, including North America,
there is a turning point where life evaluation
deteriorates with higher levels of income.
They speculate that the causation could be
that high incomes are typically accompanied
by high demands on time,
which might also limit opportunities
for positive experiences like leisure activities.
Money can increase positive emotion,
decrease negative emotion,
and increase positive life evaluation.
But in all cases, there is a satiation point.
And in a case of life evaluation,
there's even a point where more income
seems to be related to a decrease in happiness.
To understand money's role and wellbeing,
we can think back to the PERMA model.
Money is a necessity to meet basic needs and reduce stress.
Both important for positive emotion.
Money allows us to invest in skills,
hobbies, and activities, driving engagement.
Money affords shared experiences, memberships,
and the time needed to build and maintain relationships.
Money frees up time to be involved
in things greater than the self
like family, politics, work,
community, and social causes.
And money can fund the path to achievement and mastery
in sports, hobbies, or work.
It's clear that money has a role to play,
but it is a mistake to focus on money
rather than what it affords.
In "Time Smart How to Reclaim Time
"and Live a Happier Life,"
Ashley Whillans explains that people who value time
more than money are likely to be happier,
make more frequent social connections,
have a stronger relationship with their spouse,
and be more satisfied with their job.
Valuing time over money is also prosocial.
When we feel that we have more time,
we are better able to serve other people,
which in turn increases our own happiness.
Whillans argues that we're living
in a time poverty epidemic.
People who are time poor are less happy,
less productive, and more stressed out.
Some of the biggest causes of time poverty
relate directly back to the pursuit of money.
People incorrectly believe
that earning more money today
will allow them to be happy in the future.
And they tend to undervalue their time.
Instead of being so willing to trade time for money,
as many of us, are working less and trading money for time
by outsourcing unpleasant tasks can increase happiness.
Gaining time affluence is important to a happy life,
but what you do with your time also matters.
Active leisure activities
like volunteering, socializing,
and exercising are related to happiness.
Flow, the state of emergent
in a task that is both challenging
and aligned with your abilities is a state
that many people value even more than pleasure.
The activities that tend to result
in persistent happiness are not big,
expensive, experiential, or material purchases.
The best things in life really are free,
or at least they're not luxury goods.
This doesn't mean that all spending is bad.
The 2010 paper titled "If Money Doesn't Make You Happy
"Then You Probably Aren't Spending It Right"
by Dunn, Gilbert, and Wilson
explains some of the biggest problems
are our inability to make accurate, effective forecasts.
And our tendency to adapt quickly to our circumstances.
People are often wrong
about what will increase their happiness
in the future and for how long that happiness will last.
The authors offer some suggestions.
Spending on experiences is more impactful
to happiness than spending on things.
People are happiest when they're engaged
in what they are doing
and experiences can provide this engagement.
Reflecting on past experiences enhances mood
more than reflecting on past material purchases.
And people tend to anticipate
and remember experiences more than things.
It's also harder to adapt to experiences than to things,
since each experience is unique, while things are static.
Experiences are more likely to be shared with other people
and strong relationships are important to happiness.
Keep in mind though
that while spending on experiences may be better
for happiness than spending on things,
the best experiences don't have to cost a lot of money.
Another way to deal with hedonic adaptation
is buying frequent small pleasures
rather than fewer large ones.
Dining out, going for coffee,
and getting a pedicure more frequently
likely provides more happiness
than buying lavish vacations.
Spending on other people
is another persistent source of happiness.
We are hardwired to want more money and nicer things,
but adaptation quickly leads to a desire for even more.
Happiness tends to stop increasing at moderate to high,
but not unattainable levels of income.
Valuing time over money,
engaging in active leisure activities, finding flow,
building and maintaining strong relationships,
spending money on experiences rather than things,
spending on other people,
and indulging in frequent small pleasures
rather than fewer big ones are principles
that can lead to increased happiness.
In "The Geometry of Wealth"
Brian Portnoy summarizes
what matters to humans as the four C's.
Connection, the need to belong.
Control, the need to direct one's own destiny.
Competence, the need to be good at something worthwhile.
And context, the need for a purpose
outside one's self.
Money plays an important role
in underwriting a life with connection, control,
competence, and context,
but money is not itself the objective.
Designing a happy life based on these principles
might look a lot different
from what many people would otherwise imagine
when they sit down to make a financial plan.
The traditional idea of setting your financial goals
based on some projected retirement date
and a rosy vision of the future is a flawed process
due to our weak ability to forecast
what will make us happy in the future
and our tendency to adapt to our circumstances.
It is also problematic
due to something called the progress principle.
We get pleasure from making progress toward a goal
and from achieving the goal.
But while progress toward the goal
offers continued pleasure along the way,
post goal pleasure is short lived.
In other words, when it comes to pursuing goals,
it is more about the journey than the destination.
Further complicating long distance goal setting
is "The End of History Illusion",
documented by Quoidbach, Gilbert, and Wilson.
Personalities, values, and preferences change over time.
But people tend to believe
that they've recently become the person
that they will remain for the rest of their lives.
People believe that who they are today
is pretty much who they will be tomorrow,
despite the fact that it isn't who they were yesterday.
One way to address these issues
is by inverting the goal setting process.
Try setting anti-goals.
What are the things that you don't want in your life?
Rather than looking far into the future
and making sacrifices today
to achieve a future life that you may not like as much
as you had expected,
it may be more sensible to design the life
that you want to live today
by finding ways to remove your least favorite parts.
Make the journey more pleasurable,
since it's hard to predict what will make you happy
in the future.
Before making any major financial decision,
I think it's important to ask yourself
how it will impact the five factors of wellbeing,
both now and in the future.
Not all decisions will relate to all five factors
and making decisions that prioritize one
over the others is fine
as long as you understand the trade offs.
I can't tell you what choices to make
or what to value,
but thinking about the factors
that enable flourishing can help you
make more informed choices toward a good life
that is aligned with your values and interests.
Different people will derive wellbeing
from the five building blocks
in the PERMA model differently.
A good life for you is not necessarily a good life for me.
The research discussion
this video is designed to be descriptive
of the factors that enable a good life,
not prescriptive to tell you how to live your life.
But understanding the research
can help you make better decisions.
The practical implications of moving away
from the objective of more money
toward the objective of a good life
could be things like scaling back
an aggressive savings goal
to instead pay for a house cleaner,
taking a lower paying but more enjoyable job
that results in daily states of flow,
donating to local charities and volunteering time
instead of going on lavish vacations,
or sticking to a sensible diversified investment strategy
instead of trying to hit the lottery
with individual stock picks.
Interestingly, eliminating work
which is often the primary target
of financial planning,
may deserve more careful thought.
In "The Happiness Hypothesis",
Jonathan Haidt argues that love and work
are two of the most important ingredients
for human happiness.
Love and work are crucial for human happiness
because when done well, they draw us out of ourselves
and into connection with people and projects
beyond ourselves.
Planning to work longer at a more enjoyable job
can have a big impact
on things like the amount of saving
and risk taking required to fund financial independence.
None of this is static.
Despite what people tend to think,
personalities, values, and preferences change over time.
The pursuit of a good life
is more about the journey than the destination,
and financial decisions should reflect this.
Thanks for watching, I'm Ben Felix,
Portfolio Manager at PWL Capital,
and this is Common Sense Investing.
If you enjoyed this video,
please share it with someone who you think
could benefit from the information.
If you want to hear more
about the relationship between time, money, and happiness,
you can listen to my conversation
with Dr. Brian Portnoy on episode 102,
and Dr. Ashley Whillans on episode 143
of the rational reminder podcast.
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