We're addicted to easy hits of dopamine, and it's impacting our ability to build wealth

Finance & Fury Podcast

Today we will talk about the fundamental principle of being wealthy. It’s very basic, and, if you get it right, you will start to accumulate wealth…which is the whole concept behind actually being wealthy. You don’t get dumped with a truckload of cash and all of a sudden find yourself wealthy – those who are wealthy tend to have accumulated their wealth over their lifetimes.

It’s about keeping more of your money, and investing it to grow over time.

The big dream:

• Have millions of dollars and being able to purchase anything.
  • This revolves around spending money
  • You need the money in the first place to do this though

I want to talk about the allure of getting everything that we want in one go – the get rich quick schemes

1. Lottery winners, or massive inheritances – do they never have money worries again? Well, it’s been shown that they do. And this goes back to the fundamental principle of spending more than is sustainable. The money is going to run out pretty quickly if you don’t have any discipline. People develop bad spending behaviours, so it doesn’t take long to go through $100m
2. This extreme example is important – the mobility of wealth is massive – the “1%” is a very mobile group, people move in and out of it throughout their lives – Generational wealth
   • All have the same sort of decline – 3 generations on average to spend through wealth

We all spend money and it goes hand in hand with modern life

1. Basic needs (housing, food, transportation, etc.)
2. Modern day – Easier to spend money than ever before. There is additional choice.
   • Credit availability – CCs, Loans, cashless
   • Online shopping – Amazon, delivery with minimal effort
   • Advertising – constant stimulus, triggering of dopamine
3. Why we spend money?
   • For things we need
   • For things that we want!
     • Gives us some other gain – there’s a dopamine release
     • The hedonic treadmill, and always needing to increase how much you’re spending to get the same feeling
   • What we could be doing with our money – Opportunity cost
     • Short term – What could you have done with the money spent?
     • Long term – Is it the best thing now, or could I buy something bigger later
   • How we grew up – Dopamine addicts
     • Neuropathways are developing under constant dopamine stimulation
     • Phones, Internet, Facebook, TV on demand
     • It’s then very hard to find something to fill the dopamine gap when a lot of effort hasn’t previously been put in to doing this – Spending money easily fills this

How we decide – For financial spending

1. It’s usually not cold and calculated
2. It’s really, “Pain versus gain” – ‘cost v benefit’ mental accounting – use pain and gain constructs
   • Pain – Will spending this money hurt in a certain period of time
     • If you focus on the pain of not having the money, less likely to spend
   • Gain – Good feeling and anticipated future benefit
     • Anticipation – excitement for imagined future benefit
     • Unpredictability – When we work for something and there is no guarantee of reward
   • It is hard to qualify spending money as a ‘pain’
     • The pain is not realised now – for example with a Credit card with a bill which is delayed for 60 days. The pain is in the opportunity cost, which is hard to qualify.
     • You don’t conceptualise the pain of opportunity cost with any immediacy
   • Hyperbolic discounting
     • Time – the longer the time delay, the less we tend to value the gains
     • Would you rather receive:
       • $100 today, or $110 in a week?
       • $100 in a year, or $110 in a year and one week?
     • In the world of instant gratification there is easy reward with no anticipation or uncertainty – it’s important to find meaning in delaying spending, but it gets harder and harder
     • Spending money wont help in the long term – hedonic treadmill

The Imagined Future Benefit problem – The Gain has been experienced before you finish

1. Dopamine’s release changes based on two factors – Many people think that dopamine is released when the brain receives a reward, but dopamine is actually released in anticipation of a reward.
   • It’s done to keep motivating us to work towards what we are trying to achieve. You don’t actually get much of a release when you finish working on the project – not sustainable long term to only have one goal, or none.
2. That makes it release while we are doing the activity
   • Anticipation – excitement for imagined future benefit
   • Unpredictability – When we work for something and there is no guarantee of reward

Human behaviour – How do we act when we have something we didn’t work for (or earn?)

1. It won’t make you happy – without the ongoing work for something, dopamine release isn’t going to be as great
   • Working on the goal is what provides longer sustained releases of dopamine
   • My experience – Sanding a deck – if I had paid someone to do it then there wouldn’t be that feeling of achievement
2. Beyond dopamine
   • Serotonin Status – our position in a hierarchy - spending money on nicer cars, suits, watches – Trying to live up to an ideal image. This doesn’t actually increase serotonin
   • Fake it till you make it doesn’t work here if your brain knows that you are just flashy/showy with no substance
3. The belief (anticipation) that spending money will give dopamine and serotonin becomes a dangerous cycle
   • Without fulfilment – Just have to keep spending to keep up these feelings
   • Also – Turning to easy releases of dopamine - The wrong way to do it – Easy releases of dopamine
     • Gambling – The thrill – Uncertainty and anticipation are strong here. But it’s not sustainable. You’re only losing money to get dopamine.
     • Risky investment – Get rich quick schemes – Often just lose money

The right way to do it - Best way to get rich slow

• Simply, spend less than what you earn. You spend money on things to get the same feeling that saving money can actually achieve and that working towards a goal can give you.
• This has a lot to do with investing as well, if your goal is to accumulate wealth to do something meaningful, why can’t this give the same dopamine release?
• Money is a tool – spending can give you a dopamine release and so can saving towards a target – but difference is that it is delayed

Stable and slow – More meaningful

1. Sounds cliché and has been repeated 100 times (which maybe means it’s important then?) Remember what the end game is – Being self-reliant and having meaning in your life
2. Dream, vision, purpose
   • Nietzsche – ‘To live is to suffer, to survive is to find some meaning in the suffering’
   • If you hit your goal too soon, you lose purpose. This is why big goals can be good…as long as they don’t dishearten you, they always give you something to work on. If the goal is superficial (e.g. spending) then you end up resenting work as while it provides the ability to spend – it gets in the way of what you want to spend money on

The take away

It’s all about choice – and this is why I like free markets. We have the choice to save and invest – Or chose to spend

This is why I don’t by the BS that it is too hard so you should never try

1. Anything that is worthwhile is hard – and that’s good – working to get something that is easy won’t give the same level of satisfaction as something that’s difficult.
2. Even the complaints we have really aren’t bad – I can’t afford a house – At least you can buy one in the future. You get to choose. And it’s all these choices that you make in life which lead into how well you actually achieve the things you want – job v career v purpose
3. Most of the world isn’t so lucky, though there are some people in Australia are doing it tough
4. Those who are ‘privileged’ are simply those that understand the concept of money

Thanks for listening!