You may be familiar with Predictably Irrational , a best-selling book by a professor in behavorial economics that challenges the idea that humans behave rationally. In fact, says author Dan Ariely, humans are predictably irrational in many ways that may surprise you. I recently learned about his new book, The Upside of Irrationality , in this Yahoo article by Laura Rowley, which according to the description “exposes the surprising negative and positive effects irrationality can have on our lives.”

One of the more intriguing topics Ariely explores is the idea of hedonic adaption, also known as the hedonic treadmill. From Wikipedia :

Humans rapidly adapt to their current situation, becoming habituated to the good or the bad. We are more sensitive to our relative status: both that which we recently have and that which we perceive others to enjoy.

When things are awesome, we eventually get used to it (celebrities, lottery winners). When things are really awful, we get used to that as well (severely injured). This is why it’s hard for people to achieve a constantly higher level of happiness. We get a nicer car/house/toy, we get used it, and then soon we just want an even nicer car/house/toy, never getting anywhere as if we are walking on a treadmill.

So how does this relate to money and personal finance?

Stay Happy By Slowing Down Pleasure

Considering that we only experience transient pleasure with many improvements in our lives, we should take care and indulge very gradually. Savor each slight improvement! A good quote from Ariely:

Imagine a new college graduate, finally earning an income and eagerly anticipating a beautifully furnished apartment after years of dorm living. “The lesson here is to slow down pleasure,” Ariely writes. “A new couch may please you for a couple of months, but don’t buy your new television until the thrill of the couch has worn off.”

When Slashing Expenses, Make Big Cuts

On the other hand, we should take full advantage of our adaptability by cutting back as much as possible all at once when we have to. Don’t slow down the pain and drag it out with constant reminders.

“It will be really painful for a few months but you’ll get used to it,” says Ariely. “It might be good to cut down too much — and then increase back.” By contrast, making small lifestyle adjustments every month requires readapting over and over and prolongs the pain. (By the same token, it may be better to reduce a major expense in one fell swoop, such as moving to a smaller apartment, than to face the daily downer of skipping your favorite gourmet coffee, Ariely suggests.)

I think the apartment idea is very good application of this theory, and look forward to reading the rest of this book.