PWL Capital’s Portfolio Manager, YouTuber and host of the Rational Reminder Podcast Ben Felix decide to dig up the research on the non-financial decisions that deserve our consideration when we make financial decisions.
“Financial decisions are never objectively good or bad; each decision should be considered for its utilitarian, emotional, and expressive benefits, and its impact on a good life. There is a lot more to a good life than wealth accumulation and risk-adjusted returns.”Ben Felix
Ben took the evidence-based approach by going through research papers to find out what the research says about making more happy and satisfying decisions in life. I must say, we should be aware of more of these stuff.
However, there are benefits to knowing what is backed by research and also a little about why we are generally more (or less) satisfied by these decisions. It is also beneficial to read all of these in one glance and revisit them once in a while.
If you wish to zoom in on the Dos and Don’ts, go to the conclusion of this article (which is like the summary of the summary)
Circumstances and Adaption
We would think stable circumstances such as our health, and excess income above what we need for our essential expenses, wealth, geographic location, house size, physical appearances, gender, and age will affect our happiness and life satisfaction.
They affect less because we quickly adapt to the changes in these things and it affects our happiness and satisfaction less.
Some of this stuff does require a large amount of spending that you need years to build up but you might eventually be less satisfied.
Overestimating Our Happiness if We Achieve/Get ________________________ in the Future
We often overestimate the enduring impact of future events on ourselves.
This is because:
- Didn’t realize that other unrelated events that will affect our thoughts.
- We quickly adapt to changes and become less sensitive.
- End of history illusion: We tend to believe that we recently become the person we will remain for the rest of our lives despite the reality that you from yesterday is different from you today.
It will be better to spend our time minute-to-minute rather than striving to achieve a perfectly imagined future.
Income Satiation Points
Money can increase positive emotion, decrease negative emotion, and increase positive life evaluation, but up to a certain satiation point.
There is an income satiation point. 2018 paper puts the global satiation point at US$60k and North America at $65k. Beyond this income, the sample did not experience more happiness.
Experienced unhappiness stops decreasing at US$75k globally and $95k in North America (Your pay can go down but cannot go down beyond a certain point).
For those who reflect upon whether they are happy (reflective happiness), the satiation points are US$95k globally, and $105k in North America.
In some North American places, life reflection went down as their income increased. The speculation is that higher income means more demands on their time, which limit the time for positive experiences like hobbies and spending time with others.
Acquiring more money is associated with hedonic rewards similar to illicit drugs. The initial experience is exhilarating but the exhilaration fades as it becomes a stable circumstance.
Questions to reflect:
- How would your life change if you earned an extra $1,000 per month? What would you spend it on?
- Would you work an extra 3 hours per day to earn more money?
- How much would you need to be paid to give up your favourite leisure activity?
Renting vs. Buying a Home
Homeowners are not happier and may be less happy, than renters after controlling for income, housing quality, and health. Owners spend less time on enjoyable activities like active leisure and more time working on their homes.
Some samples of homeowners have higher reflective life satisfaction, they tend to have less intense feelings of happiness. People are bad at forecasting what will make them happy, and this is amplified more for major purchases.
German data show that people overestimate the long-run life satisfaction gains they derived from moving from a rented home to a privately owned property. This is more amplified for people who are more motivated by money, fame, image, and status.
The second-largest expense in most households is transportation. Luxury vehicles are experiential purchases and are usually viewed as a positive experience.
People imagine the experience of driving a luxury vehicle to be better than an economy vehicle but their actual experience driving is not different.
This is due to focalism: People imagine the luxurious aspects of a vehicle when they asked about it, but when they are driving the vehicle, they are thinking about getting to their destination on time, avoiding traffic, or keeping the kids from spilling their snacks.
Empirical finds do not support the notion that people are happier with a luxury car than a frugal car.
Wealthy people are not necessarily luxury vehicle owners. The median cost of vehicles driven by the wealthiest people in the world is US$46k (2021) and the median amount millionaires paid for is US$35k (2018)
In a sample of hedge fund managers, those who own performance cars take on more investment risk without being compensated with higher returns, are more likely to terminate their funds, disclose violations on their Form ADVs, exhibit greater operational risk, trade more frequently, actively, and unconventionally, and gravitate toward lottery-like stocks.
Moving to a sunnier place does not increase happiness but moving closer to nature does.
Walking in nature produces more positive emotions than walking in the city.
In addition to improving mood and reducing stress, spending time in nature affects the perception of time. Time is finite, but the perception of time can be affected by our circumstances.
Circumstances to Avoid
There are negative things that you are less likely to get accustomed to.
Noise, especially variable or intermittent noise, will interfere with your concentration and increases your stress, so living next to something that constantly is noisy is not ideal.
Commute in traffic causes higher levels of stress. Thus, there is a real happiness tradeoff if you are thinking of living further away. As mentioned previously, the happiness from living in a bigger home will moderate over time but the stress level from a longer commute will build up.
Not being in control of your circumstances has a large negative impact on happiness and life satisfaction. This includes little things like plants in your home that have dramatic effects on happiness.
Things vs. Experiences
Due to the focalism and adaption principle, spending on experiences are more impactful to happiness than things.
People are happy when they are engaged and experiences encourage that. Reflecting on past experiences also enhances mood more than reflecting on past purchases. People tend to anticipate and remember experiences more than things.
Experiences are also harder to adapt to than things, so you don’t have the same old, same old feeling quite soon.
One of the best ways to deal with our poor affective forecasts and hedonic adaptation is to make more frequent small experiential purchases rather than fewer large material ones. Happiness is better predicted by the frequency of positive affective experience than the intensity.
Some examples include taking a friend out for dinner, signing up for a class in an area of interest, spending on an engaging hobby or spending on other people are all approaches to spend where the affective experience is not easily adapted.
Material exceptions are the equipment that facilitates experiences such as woodworking tools or a 3D printer.
Time vs. Money
Both are desirable, finite, scarce and measurable. Money allows us to move value forward and backwards through time.
People who prioritize time over money are
- have a greater social connection
- better relationship with their spouse
- more likely to choose a job that they enjoy
Even thinking about money can be problematic. They are
- less interpersonal attuned
- less prosocial
- less caring and warm
- eschew interdependence
People with higher incomes feel that they have less time and people overestimate how much happier they would be with a higher income. One reason that people are unwilling to trade money for time is that they find it hard to measure the monetary cost of time.
Questions to reflect on time vs. money:
- Do you prefer money over time or time over money?
- How much spare time do you have? How much spare money do you have?
- Do you include the monetary cost of your time in daily time vs. money decisions?
- Are there unpleasant tasks in your life that you could outsource?
- Have you gone out of your way to saving money recently? Was it worth it?
One of the main reasons for regret is financial decisions have uncertainty. If you make a good decision based on fundamentally reliable financial economics, behavioural, and psychological input, it does not guarantee a good outcome.
Regret is a unique emotion for decision-makers because, unlike other negative emotions, regret cannot be experienced without choice. We all hate “the stomach-churning feeling that the present would be better and the future brighter if only you hadn’t chosen so poorly, decided so wrongly, or acted so stupidly in the past”.
If we have a high frequency of regret, our life satisfaction also goes down.
This is constructing alternative realities in our minds where things would turn out differently. We will feel regret if we can readily imagine having taken an action that would have led to a more desirable outcome.
If you are closer to the desired outcome, it is easier to form that alternate reality.
Counterfactual Thinking is driven by:
- Contrast effects juxtapose reality against what might have been in an alternative reality. “I almost came in first” gives the silver medalist less satisfaction while the dominant counterfactual that “I almost came in fourth and didn’t win a medal” gives the bronze medalist more satisfaction.
- Causal inference effects are the result of imagining an alternative reality. You will regret more if the actions leading to the alternative reality differ from the current reality by one single action. However, often in the future, doing the same actions that led to that alternative reality may not lead to the same outcome in the future.
What do people regret?
Most commonly about family (21.8%), partners (19.2%), education (15.6%), career (15.1%), finances (13.5%), and health (6.6%).
57% of the people regret inaction rather than action (35.9%)
- Foundational regrets. Failure in foresight, responsibility, and prudence with long-term consequences. Overspending/undersaving. The main reason is people have a hard time connecting to the future or underestimate the future.
- Boldness regrets. Playing too safe and imagining a better alternate better life. People tend to regret the things they failed to do more than the things they did.
- Moral regrets. Hurting people like bullying, and insults. Cheating in relationships. Disloyalty by falling short of obligations to a group. Subversion through disrespect to parents or teachers.
- Connection regrets. Relationships that have come undone or remain incomplete
Preventing Future Regret
We can moderate or eliminate through
- Improving decision quality. Widening your options. Reality testing your assumptions. Attaining distance before deciding. Preparing to be wrong.
- Increasing decision justifiability
- Transferring decision responsibility
- Ensuring decision reversibility (if possible).
- Avoiding feedback about unchosen alternatives.
A Model for a Good Life
This introduced the PERMA-V model which is a five-factor model of well-being.
1. Positive Emotion
People generally can identify positive emotions:
- Savouring small pleasures
- Sel-efficacy – the feeling of control
- Hope and optimism
Increasing wealth decreases the ability to savour small pleasures.
The hedonic treadmill refers to our insatiable desire to attain the next source of positive emotion in search of happiness. We may get a short burst of positive emotion from such things but quickly adapt to them and begin to search for the next thing.
When making a financial decision, it is important to ask how the decision will impact positive emotions in the long and short term and whether it is worth the money.
Flow is the state of total involvement in an activity that requires complete concentration.
The nature of flow requires skill at completing some challenging tasks, which often have some economic value to earn even a bit of income. This can have a positive impact on planning.
So if the financial planning’s goal is to eliminate work, then we might need to think carefully as someone might be less happy when they cannot do engaging work. 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.
People with strong ties to friends and family and a commitment to spend time with them have the highest levels of well-being. An impact on financial decisions could be funding time to spend on relationships rather than material purchases.
A meaningful life consists of belonging to and serving something bigger than the self. These do not need to be grand gestures.
Being involved with community, family, work, religion and social causes.
Achievement, competence, success and mastery are relentlessly pursued by many humans even when they do not lead to positive emotion, meaning or relationships. Accomplishment can occur at work, sport, or hobby.
Strong evidence that physical and mental health are closely related. Poor nutrition causes low mood. Gut bacteria are related to anxiety and depression.
High consumption of red and processed meat, refined grains, sweets, high-fat dairy products, butter potatoes and high-fat gravy, and low intakes of fruits and vegetables is associated with an increased risk of depression.
Exercise reduces anxiety, depression and negative mood by improving self-esteem and cognitive function, sleep, increases energy and reduces stress.
Sleeping less than 7 hours per night is associated with weight gain, diabetes, hypertension, heart disease and stroke.
For many years, goals-based financial planning has been the backbone of the financial services industry.
Defining and prioritising goals in the financial planning process is objectively valuable. Knowing which goals to fund and how to fund them can lead to a substantial increase in utility-adjusted wealth.
People are deficient in generating the possible set of objectives for the decisions that they make. They do not think broadly enough about the range of relevant objectives or do not think deeply enough to articulate every objective with the range that is considered.
1. Generating Objectives
Many people will struggle to identify their personal objectives on the first try. A good first step is generating a list of objectives without outside help.
Knowing that the initial list will be deficient, the next step is to revisit the task of identifying objectives with a stated challenge of approximately doubling the number of objectives initially identified.
2. Effective Goals
Effective goals are statements of a desirable state, not the means to get there. Don’t talk about the costs. Having more time for leisure activities.
Abstract goals put focus on the meaning of your actions.
Approach goals or avoidance goals will depend on whether behaviorally you have a stronger approach or inhibition system.
You should consider the following statements:
- When I want something, I usually go all out to get it
- When I see an opportunity for something I like, I get excited right away
- I worry about making mistakes
- Criticism or scolding hurts me quite a bit
#1 and #2 = Approach, #3 and #4 = Avoidance.
3. Pursuing Goals
To turn a goal into action it is important to create challenging, measurable, actionable, and self-set targets.
Targets with minor consequences for failure increase motivation and execution towards completing the desired actions. Measurable targets are necessary as a feedback loop to monitor progress.
Actionable targets are practically useful in day-to-day life.
Meeting targets should not feel like a chore. If you do not enjoy the means, or the means does not feel like it is accomplishing the goal, it will be more challenging to stick with it.
People feel more motivated if they achieve mini-goals or when an activity is fun.
We get pleasure when making progress toward a goal. The pleasure from achieving a goal tends to be short-lived. It is more a journey than a destination.
4. Organizing Goals with a Goal System
A good life has a lot of ingredients, but too much of any of them will be to the detriment of the others.
There are different means to achieving the goal that you want:
- Multifinal – means that serves more than one goal. Walking to work with a friend, saving money on parking, exercising and socializing.
- Equifinal – one of multiple means that serve the same goal. Hiking, walking to work and swimming all serve to be healthy.
- Unifinal – means that serves only one goal.
Multifinal means are efficient, but from the perspective of motivation, they can weaken the mental link between the top-level abstract goal and its means.
A goal system makes the relationship between means and goals easier to understand but does not determine how to deal with conflicting goals.
Resolving goal conflicts can be accomplished by prioritizing some goals over others or by compromising between multiple goals.
When you view a goal as central to your identity or see it as a moral or ethical issue, it makes sense to prioritize.
Now that you have read the summary, you can take a look at Ben’s paper with the citations here.
Running through the list, we could probably consolidate this into two lists as a blueprint for how we can achieve greater life satisfaction.
Do more of:
- Enjoy current experiences more
- Ensure our income does not fall below a certain level that would affect us
- Venture into nature more
- Be in control of your circumstances more
- Reduce your commute to work if possible
- Choose experiences over things whenever possible unless the thing facilitates certain experiences
- Make more small, but frequent good experiences such as meeting with people, spending money on other people, going on short getaways
- Improve decision quality, try to add decision reversibility, try hard to justify our decisions before making them, and don’t think about what-ifs too much after we make the decisions to reduce regrets in life
- Practice gratitude, be more mindful and savour small pleasures to have greater positive emotions
- Find a job or things that you can be fully engaged to be in the flow state constantly
- Have strong ties with friends and family
- Find something you feel meaningful and belonged to and do that
- Maintain strong vitality
- Learn to set goals well
- Spend time thinking of more goals
- Define your goals based on the desirable state you wish to achieve. Make sure they are less about the costs.
- The goal can be abstract enough that centres on the meaning of the actions
- Differentiate between approaches and avoid goals
- The goal has to be challenging enough
- Try to have minor consequences for not achieving the goals to increase motivation and execution
- Achieving the goals should feel less like a chore and more fun
- Have more mini-goals
- Create multifinal means to “superset” and achieve a few goals
Do less of:
- Think that if we do something, our lives will change in a very big way
- Remember that income beyond a certain point will drive happiness less
- We will quickly adapt to our home surroundings and would eventually not feel the “happiness ping” of owning and living in a home
- Eventually, we will be more concerned about getting from point A to point B, and if care is rather decent in functionality, anything more than that will not give us the life satisfaction unless we are a car enthusiasts
- Avoid living or working in areas where there are constant irritations
- Buy less material things especially big-ticket items because we tend to adapt to them faster and will feel less of the “happiness ping”
- Prioritizing money over time too much
Here are my past deep dives into happiness:
- Making Great Non-Financial Decisions to Fund a Good Life – An Evidence-based Approach
- What if Your Life’s Happiness and Success Can Be Seen as Equations?
- Controlled Progress Creates Happiness in Your Life
- Visualizing How Happy You Are With Your Life
- Buy Time and Build Deeper Relationships for Greater Happiness, whether You are Affluent or Not
- The Secrets to a Career That is Truly Satisfying
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