Thursday, March 28, 2013

Lottery Winners, Hedonic Treadmill, and Financial Planning

It is believed that people return to their basic 'happiness' level despite sudden changes in their environment.
That is, winning the lottery will not keep you happy for long.
OK. So, that made me think. If we derive pleasure/happiness, in a large part, not from the absolute value of our situation (e.g. disposable income) but from the change thereof, we should plan our lives to be continously improving. It also makes life into one obscure differential equation.
If this theory is correct, then we should prefer an income of 30k at the age of 30 and an income of 50k at the age of 50, rather than a constant income of 40k throughout. (assume numbers are inflation-adjusted). The first scenario will include many opportunities for promotions and achievements, and many opportunities to improve your standard of living. The second will not. In that regard, lawyers (who make more as they gain experience) may be better off than technologists (who generally do not past some point).
From a financial planning point of view, this may indicate that a good retirement financial plan should not assume only cost-of-living adjustment but a real increase in retirement income (at least, when possible) even at the expense of a slightly lower initial expense or slightly delayed retirement. Interesting.

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