Hedonic Treadmill

Definition

The Hedonic Treadmill, also known as Hedonic Adaptation, is a theory in behavioral finance proposing that people tend to return to their original levels of happiness or satisfaction, regardless of major positive or negative events or life changes. Essentially, as a person makes more money, their expectations and desires rise in parallel, negating any increased happiness from the wealth increase. It suggests that chasing wealth or material possessions does not lead to lasting happiness.

Phonetic

The phonetic spelling of “Hedonic Treadmill” is: hɪˈdɑːnɪk ˈtrɛdˌmɪl

Key Takeaways

<ol><li>The Hedonic Treadmill, also known as Hedonic Adaptation, refers to the observed tendency of humans to quickly return to a relatively stable level of happiness despite major positive or negative events or life changes. It suggests that our circumstances, good or bad, only temporarily affect our happiness level.</li><li>This concept argues that although occurrences such as a promotion or a life-changing illness temporarily increase or decrease happiness, people quickly adapt to these changes and return to their baseline level of happiness over time. Thus, the pursuit of happiness may seem like running on a treadmill, where you continue to run but remain on the same spot.</li><li>Understanding the Hedonic Treadmill can help individuals refocus their life goals. Instead of constantly seeking external sources of happiness like wealth, status, or material possessions, focusing on internal sources such as personal growth, relationships, and contentment can potentially have more lasting impacts on happiness.</li></ol>

Importance

The term Hedonic Treadmill, also known as Hedonic Adaptation, is crucial in business/finance primarily due to its impact on spending and saving behaviors. It refers to the theory suggesting that no matter how much one’s financial situation changes, whether it is an increase or decrease, one’s level of happiness tends to return to a baseline over time. This concept is important for understanding consumer behavior, particularly the tendency for individuals to pursue ever-higher levels of income or wealth without achieving a corresponding increase in happiness. In terms of personal finance, it emphasizes the importance of managing expectations and practicing conscious spending rather than constantly seeking more, which could lead to unsustainable financial decisions.

Explanation

The Hedonic Treadmill, also known as Hedonic adaptation, is a concept that primarily serves to illustrate human behavior and satisfaction in correlation to one’s economic state. This psychological theory suggests that people generally maintain a steady level of happiness despite positive or negative changes in their financial situation. The concept is often applied to explain why individuals who experience a significant increase in income levels or wealth do not necessarily experience a permanent increase in happiness.The purpose of the Hedonic Treadmill in finance and business is to help understand consumer behavior and how personal satisfaction might influence spending habits. Companies use this concept to design their products and marketing strategies in a way that continually stimulates consumers’ desire to acquire new goods or services. Meanwhile, financial advisors apply it to help their clients understand why lifestyle inflation can occur after a raise or significant financial gain, thus encouraging them to manage their wealth more effectively. The Hedonic Treadmill serves as a reminder that adaptation to wealth can lead to unsustainable spending patterns if unchecked.

Examples

The Hedonic Treadmill, also known as Hedonic Adaptation, is a theory positing that people return to their normal level of happiness, regardless of what happens to them. It suggests that regardless of a positive or negative event, people will eventually adjust their expectations and desires such that their baseline level of happiness doesn’t substantially change. Here are three real-world examples:1. Salary Increases: A classic example is getting a raise at work. Initial joy at the increased income rapidly gives way to increased spending, elevated living standards or new desires (like a bigger home, a better car, fancier vacations, etc.). Soon, the individual finds themselves just as happy (or unhappy) as they were before the raise, having adjusted to their new financial reality.2. Winning the Lottery: Despite the short-term joy from winning large sums of money, many lottery winners report returning to their original levels of happiness within a few years of their windfall. The luxury and ease that the money brings quickly becomes the new norm, and once the initial elation fades, they adapt to their new circumstance and the level of happiness doesn’t seem to change drastically in the long run.3. Adapting to Negative Events: A person might dread the idea of becoming disabled or seriously ill. But research has shown that individuals who experience such life-changing events often report returning to their pre-incident levels of happiness within a period. They adapt to their new normal, and their level of happiness adjusts accordingly.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Consumer Behavior
• Adaptation Level Theory
• Lifestyle Inflation
• Materialism
• Psychological Hedonism

Sources for More Information

• Investopedia
• Psychology Today
• Positive Psychology
• ThoughtCo