Unfortunate Realities You Should Get Used To

Sorry, guys.

Jun 27, 2014 at 10:48AM

Unnamed

I have bad news, folks.

1. You will spend your life chasing a net worth number you think you will make you happy, but never get there.

People talk about their "number," or the amount of money they think will make them happy and content. I'm convinced these numbers are what most people live for.

But they're dangerous. People are bad at forecasting almost everything, but trying to predict how you'll feel in the future is a whole different level of delusion.

Once you hit your number, you'll probably realize you're no more content than you were before, move the goalpost down the field, and resume chasing your tail. You'll do this your entire life.

Psychologists call this the hedonic treadmill, and it can make you miserable.

The best studies show that more money does in fact make people happier. But there's a difference between becoming happier and being satisfied with your happiness, which is what most people ultimately want. The paradox goes like this: More money leads to more happiness, but that leads to greater aspirations for more happiness, which will leave you discontent. Nobel Prize-winning psychologist Daniel Kahneman once wrote:

My wife Anne Treisman, was (and remains) convinced that people are happier in California (or at least Northern California) than in most other places. The evidence showed that Californians are not particularly satisfied with their life, but Anne was unimpressed. She argued that Californians are accustomed to a pleasant life and come to expect more pleasure than the unfortunate residents of other states. Because they have a high standard for what life should be, Californians are not more satisfied than others, although they are actually happier. This idea included a treadmill, but it was not hedonic -- it was an aspiration treadmill: happy people have high aspirations.

As the saying goes, the grass is always greener on the side that's fertilized with bullshit. Nowhere is understanding this more important than with money.

2. A lot of what you know is wrong, incomplete, distorted, and subject to revision

There's a bias called the "end of history illusion." It says that people think changes in taste, new ideas, and learning in general occurred in the past, but today we've got it all figured out.

The truth is we're always learning how wrong we were in the past. We think it's crazy that people used to think smoking wasn't harmful, but those people thought it was crazy that their ancestors had little concept of sanitation, and those people thought it was crazy that their own ancestors thought the world was flat. People need to believe they're doing things the right way, but the reality is that for every point in history -- including today -- someone in the future will look back and say, "Wow, what were those idiots thinking?"

In his book The Half-Life of Facts, Samuel Arbesman showed that in many fields, the majority of what we once considered to be fact is eventually disproved. He wrote:

Facts change all the time. Smoking has gone from doctor recommended to deadly. ... We used to think that the Earth was the center of the universe, and our planet has since been demoted. I have no idea any longer whether red wine is good for me. My father, a dermatologist, told me about a multiple-choice exam he took in medical school that included the same question two years in a row. The answer choices remained exactly the same, but one year the answer was one choice and the next year it was a different one. 

A few more examples:

Medical knowledge about cirrhosis or hepatitis takes about forty-five years for half of it to be disproven or become out-of-date. This is about twice the half-life of the actual radioisotope samarium-151. ...

More than a third of all mammals that allegedly were lost to time in the past five hundred years have since been rediscovered. ...

If, as a baby boomer, you learned high school chemistry in 1970 ... you would not realize that there are at least 12 new elements in the periodic table, bringing the total up to 118.

On a smaller level, monthly jobs numbers are revised seven times, companies are constantly restating earnings, and one of the most popular economic studies of the last decade was filled with Excel errors. Last year I asked AIG founder Hank Greenberg if, even in hindsight, investors could have known how much risk the company was on taking during the housing bubble by reading its annual reports. "I'm not sure the [annual reports] that they filed were complete," he said.

The odds are close to 100% that you're doing something today you'll later regret. And not because you're making a bad decision, but because you're relying on facts that just aren't true.

3. People are less impressed by your success than you think

Most people in the developed world are about as comfortable and safe as they're going to get in their lives. Their incentive to get richer is to impress other people.

But while people spend their lives trying to impress their friends, a trait they find most attractive in those friends is humility. Few of us ever connect these dots.

Psychologist Coreen Farris of Indiana University did a study showing that men are terrible at picking up social cues from women. "Young men just find it difficult to tell the difference between women who are being friendly and women who are interested in something more," she said.

People do something similar with money. They find it difficult to tell the difference between people who are impressed by your success and those who think your bragging is insufferable.

You'd be shocked at how little people care about your car, boat, house, purse, or vacation. "People care about your profits almost as much as they care about your fantasy football roster," investor Michael Batnick wrote this week. Good lesson to remember.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

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Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.

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