Thursday, March 26, 2009

Hedonic Adaptation in Retirement

“Ram, are you thinking of coming back to work?” “Are you doing the things you wanted to do?” These are the questions that I regularly get asked via email or phone calls with friends and ex-colleagues.

What they are really asking is this: So now that you left work, are you really, really happy? Since most of us dream of not having to go to work, I know that my answer could be a valuable data point for them.

I really am very happy, but the reason I can’t be gaga ecstatic in my response is because I am aware of hedonic adaptation.

At its simplest, hedonic adaptation is the theory that humans rapidly adapt to their current situation, becoming habituated to the good or the bad. As a mnemonic for this phrase I think of hedonism – the pursuit of pleasure – and then link ‘adapting to it.’

(For the sake of completeness I should also mention that there are many who make nuanced arguments and try to refute or caveat the theory of hedonic adaptation.)

I first came across this term a few years ago in Daniel Gilbert’s excellent book “Stumbling on Happiness.” (I am a happiness literature junkie.)

Lottery winners are almost always mentioned as the textbook example of hedonic adaptation. Every study of lottery winners shows that after around 18 months or so, they are no happier than they were before winning the lottery.

I have seen a variation of it in my own case. Whether I am working or not working, I seem to feel equally busy. When I was working, it was fairly common for my list of to-do’s to have 15-20 items or more. I would knock off as many as I could, and roll over the remaining tasks for the next day. These days, I have much fewer items, but it still feels like I am just as busy. (Witness hedonic adaptation.)

Hedonic adaptation can be a very good thing when things go bad for us. We learn to adapt to it, to return quickly to our ‘set point.’ The flip side is that even when very good things happen to us, we get used to them very quickly too. (Can you remember the very first search you did on Google? It seemed like a great thing had happened to us -- the Web coupled with Google seemed to open up possibilities like never before. But today, we have so thoroughly adapted to the existence of Google in our lives that we just are not as thrilled about it as we once were.)

Knowing that hedonic adaptation exists, I have to constantly remind myself of how fortunate I really am, of how much I value my free time and that I should be using that time for things I think are worth doing, for things that make me happy.

These psychologists (who seem to have a metaphor for everything) are now dubbing this as being on the hedonic treadmill – no matter what speed, you end up in the same place.

Thursday, March 19, 2009

Apply before you leave your job

Rupal wanted me to pass this along to anyone considering early retirement or a hiatus from employment:
Make a list of the places where you will be applying for anything financial (Credit cards, loans, leases and the like) and apply before you leave your job.

We learned this the hard way. It didn’t occur to either of us until we had already left our jobs. Here are a couple of real examples.

After years of not having time to spend on my portfolio, I decided that I would look into selling covered calls. I own a few ETF’s (SPY, QQQQ). I understand the theory and the risks and rewards of selling covered calls well. But I found out that my brokerage account wasn’t approved for Options trading. So I logged on to my brokerage and applied for it online. But in the application, I had to state that I was unemployed and had no income to speak of. Sure enough, I got rejected. (No complaints, I would have done the same thing if I had been the one reviewing my application.)

Second example: My wife and I are now applying for a new credit card because it has no foreign fees for transactions abroad. (That would save us 2-3% on each transaction in India.) But I won’t be too surprised if we get rejected.

Maybe I should try claiming that I am self-employed. I know if I had applied when I had my corporate job, I’d have gotten the approvals fairly easily.

Lesson: Before leaving your job, take the time to think about (and make a list of) the various places that you would be applying for anything financial. If you are planning to move to a different town after quitting your job, you should seriously consider getting your leases, loans etc. done while you are still employed.

Tuesday, March 17, 2009

"Free" Real Estate Seminars

Call it journalism, or call it joblessness or just plain curiosity, but in the past two weeks, I went to two free "workshops" on Real Estate investing – one by the Rich Dad, Poor Dad author Robert Kiyosaki’s team, and one by Donald Trump’s team. Having time in the middle of the day means that I can attend programs that I wouldn’t be able to, if I was busy at work.

I claim it was journalistic purposes because I have no interest in being a real estate investor whatsoever. I don’t even own a primary residence. But I went because I was very curious about the people who attend these seminars (in the middle of weekdays) and I wanted to study the presenters and hey, it was free.

These were both 90 minute sessions, and as I learned the main intent of these workshops was to get people to sign up for 2 and 3 day advanced seminars, where they teach you lots of Real Estate techniques in great detail.

Here are some of my impressions and notes from the free pre-class:
  • Behold the power of Branding. Thanks to the popularity of TV shows (The Apprentice) and books, people like Donald Trump and Robert Kiyosaki have become household names. They are able to capitalize on that by essentially franchising themselves. Trump’s is called Trump U., and Kiyosaki markets it as “Rich Dad Education."
  • Though it is not the intent, you can learn a lot about good presentation techniques by studying these presenters. Their task is to take disbelievers (who are most likely not economically well off and quite possibly unemployed) and try to sell them expensive course packages. The presenters were without exception great sales people.
  • One clever technique I saw was to ask everyone to hold all the questions till the end. This is because they don’t want disbelievers disrupting the sales pitch, casting doubts.
  • They will repeatedly make fun of anyone who has any doubts whatsoever.
  • These folks must have all gone to the same NLP techniques class, because they all use it. Programming the audience first and then repeatedly making them shout out the same words and phrases over and over again. “Because I am going to help you make what?” and the real estate market has been really going where? and so on. (Correct responses: “Lots of money” and “Down”)
  • They will pretend to get very angry when the audience doesn’t respond to moronic questions. “So does working for only 4 hours a week sound good to you?” “Would you like to make $20,000 on your very first deal?” (Hint: You are supposed to scream your Yes very loudly.)
  • They make fun of books and CD’s that you see on late-night TV infomericals, and yet they try to tempt you with books that you absolutely must own and will get only if you attend the 3 day seminar.
I am really not knocking these multi-day seminars. They might be just the thing for people who have the willingness, but not the know-how. I approve of a lot of what they say – yes Knowledge is very important, and yes everyone has to take action if they are serious about improving their lot in life. I know that these Real Estate techniques (pre-foreclosure, short sales etc.) do work for some, and that the fees for these 2 and 3 day classes will pay for themselves for some people.

I just don’t approve of how easy they make it sound.

Friday, March 13, 2009

Retirement -- Do you get on each other’s nerves?

Just the other day, my friend Srini posed a question that his wife had wanted to ask. Now that my wife and I are spending all our time at home, she wanted to know if we get on each other’s nerves?

I was concerned about exactly this aspect as I was leaving my job last year. In many ways, I feel that this is an even more pertinent retirement question than the questions about finance, which is what most people first think of.

In our case, for the most part, we are handling all this extra time together fine, though this is really more than a yes-or-no question. The fact that both of us left our jobs at around the same time has worked in our favor. In several retirement books, I have read that the second spouse (one who retires later) ends up disrupting the rhythm and the free time that the first spouse has gotten used to. This causes some resentment and leads to arguments.

Over the first few weeks of being home-bound, we re-divvied up the chores in ways that seem fair. We’ve fallen into a pattern of activities that we end up doing together (movies, TV, library visits and even grocery shopping) and there are times when we just do our own things.

From time to time, I will relocate to a different room just to get some space. I zealously carve out time to read books alone. I meet friends for coffee and have occasionally headed off alone to events, bookstores or to a coffee-shop to be by myself.

Lesson: Before you retire, have a discussion with your spouse on what you expect to be doing together and agree on having some time alone for each of you alone (if that’s important to you.) The biggest trick (I think) is to be able to catch the trigger points that lead to repeated arguments.

So to answer the original question, overall we’ve worked to reach an equilibrium without getting on each other's nerves. And I have actually been surprised that it has turned out better than I expected it to.

Wednesday, March 11, 2009

Flood-It! game strategy

Note: If you came to this post looking for Flood-It strategies, welcome! Some links can be found in the comments section below the original post. (Ram)

An innocuous little message showed up on my iGoogle page a few weeks ago. A colorful icon with the accompanying message that said, "Recommended for you." It was a game. (Wonder why it was recommended since I didn't have anything to do with games on my page.)

Being curious, I checked it out. The goal is to "fill" the board with one color by clicking on different colors to flood the board in 25 moves or less. After you have played a few games, you start to develop neat little strategies.

Like many of my "consuming interests," I expected to grow out of it within the week. Meanwhile, I felt it was good mental training and kept playing.

But my interest didn't fade. Instead, myself (and a couple of like-minded friends) have been spending unhealthy gobs of time trying to 'solve' the game with optimal strategies. (That is, trying to finish each board with the theoretical minimum possible clicks.) If you too end up spending lots of time devising algorithms, send me a note or leave a comment and we can discuss offline.

Meanwhile, check out the game. (If you use iGoogle, you can add it to your page.)

Thursday, March 5, 2009

Blog Spotlight - Early Retirement Extreme

I have wanted to "spotlight" a few early retirement blogs that I follow. One of the earliest ones I found was Jacob's ERE -- Early Retirement Extreme Blog. His own subtitle reads: Financial independence, frugality, self-sufficiency, ecology, capitalism, and voluntary simplicity.

One thing is clear - the word "extreme" is very apt. Jacob's mission seems to be to shake people up a little, sometimes by throwing out numbers and statements which at first glance seem preposterous ("You can get by on $6000 per year per person in the Bay Area" is a favorite claim of his.) But he then backs up his statements and claims by describing how he does it.

I was intrigued and impressed enough to interview him and below are his responses to my questions.

Ram: Tell us a little about your own retirement story. (Why does Early Retirement interest you? How do you plan to get to it?

Jacob: When I started my blog, one of the first things I did was to write a series of posts on how I went about it, starting with this one. It is really quite simple: Spend very little and save the rest. The trick then becomes how to live as well as possible while spending very little. In the beginning I was not that good at it as could be expected having been your typical middle class consumer. Today, it would be hard to tell from appearances that I only spend about $6000 a year (in the Bay area).

Lots of people seem to be unable to wrap their minds around a number like that. However, there are many people in the country that lives on that amount and even less; however, their problem is that they lack the skills, desire, or opportunities to earn much more than that. In general, however, everybody seems to spend all they earn and that is what prevents them from a life of leisure, and so the problem is that we have been conditioned to spend all that earn. I mean, most personal finance blogs out there tell you to save 15% of your income. Most people here would consider that pretty good, but 15% is so negligible that it would take a good three decades of work to become financially independent. Some think that 30% or 50% is a lot. It is, but only relative to the paltry 15%. In China, the average is 50%. If you want to retire in your 30s, you need save even more than that, closer to 75%. This means that if you can live on $6000 and you can earn a little more than $24,000, you can make it. Conversely, if one lacks the competence to live on anything less than, say, $30,000, one would need a six figure income and not that many earn that right out of school.

2. What are some of the things you plan to do while retired?

Jacob: Even while working I have several balls in their air. What do I do for relaxation? Well I work or rather I do things. I'm not sure I should call it working because "work" usually implies something you do because you have to. In fact, aside from a few jobs, I have never really felt like I was working insofar that I would still be doing what I did/do even if I didn't get paid. I think that's a great situation to be in. I think I have been lucky not having to have considered work "work" for most of my career.

Anyway, since I was 25 or so I used my spare time doing various forms of non-profit work setting up web pages and writing articles and books about the world's problems. In fact, the blog is one such project. I would like to dedicate more time to this. Currently, my main focus is on global warming, resource depletion, and overpopulation. This is essentially about humanity learning that it lives in a finite world and that it/we/our economy can not keep growing forever, lest we self-destruct.

Solving this problem will be to our generation what avoiding global nuclear war was to our parents and grandparents. Somehow they agreed that saving the planet from destruction was worth it. Now our generation has to do the same, so this is what I want to work on doing.

3. Do have any Early Retirement fears? That is, things that might disrupt your plan for enjoying early retirement?

Jacob: Other than running out of money one way or the other (hyperinflation, say), my biggest fear is the "What if"-monster, e.g. how my life could have turned out otherwise. For any human, there are probably only a handful a really important decisions to be made during a lifetime, which can be said to have a single cause. I'm not talking about eating unhealthy or healthy or working hard or being lazy. Those behaviors merely contribute to a trend. What I'm thinking about are decisions that are almost singular in time such as who to marry, whether to have children or move to another country. Those are defining moments and retirement is certainly a defining moment. Two things should be considered: What will happen if I retire and what will happen if I do not retire. Both are uncertain. In particular I wonder whether solving the three problems mentioned above can be more effectively done within the confines of regular employment.

4. What advice/suggestions do you have to those who want to retire (early)?

Jacob: My advise is to learn how to spend less and still live well. It is far easier to learn to spend 5 times less than it is to learn to earn 5 times more. Most consumers seem to think there's a direct correlation between how much one spends and how well one lives. It's an idea that is continuously reinforced by society, so it is hard to let go off. However, letting go of that and "daring to be different" is practically all that is required. Some "get" that right away, while others seem to be very stuck in their ways.

5. What is your blog about?

Jacob: Well, it could be described as the "The way of Jacob" :-D It is idiosyncratic, iconoclastic, and often contrarian as well. It's like Fight Club without the fight or The Matrix without the matrix or Idiocracy without the idiots. The funny thing is that for those who "get it", the posts actually make sense. The rest probably think I'm crazy :-)

Please be sure to check out Jacob's blog.