Mental Model: The Revolution of Satisfied Expectations
The Revolution of Satisfied Expectations: “Research conducted by Daniel Kahneman of Princeton University, and by others who have come to approximately the same conclusion, shows that most people judge their well-being not by measuring where they stand but rather based on whether they think their circumstances and income will improve in coming years. For example, in the 1950s, when most American families lived in small houses, owned one car, and few if any family members attended college, people were in good spirits because they expected soon to earn and possess more. Now most families live in larger houses, own at least two cars, and send most children to college – that is, they have what people of the 1950s dreamed of having. But because most now have so much, it’s hard to expect that the coming years will bring even more.” Source: The Progress Paradox by Gregg Easterbrook
In other words, most people would be happier earning $50,000 a year but seeing their income increase each year, improving their furniture, getting a slightly nicer car, etc., than they would be if they made $500,000 a year but never saw any increase in income and they already had all of the things they want. Again, it is completely and totally irrational.
This psychological tendency is one of the reasons the politicians of a nation are so successful at creating “back-door” tax revenue through inflation. By printing more money than population growth alone demands each year, a nation’s central bank can effectively transfer some purchasing power from its citizens to the government. Most people, whether talking about paychecks or social security benefits, would rather see an increase in the dollars they receive each year even if their purchasing power isn’t increasing. They would be unhappy if the dollars they received decreased even if their purchasing power increased due to deflation.
Put another way, if you are the ruler of a nation, it is difficult to do what is best for the average citizen because most would be happier receiving a 3% wage increase even if inflation were running 4% (so they lost 1% purchasing power for each hour worked) than they would be getting a 25% pay cut but seeing their purchasing power increase by 30%. Even though they would be far wealthier in the second situation, they would focus on the fact they were making $75 for every $100 they made before, even though their $75 now buys more.
This explains how we can have a nation full of people screaming about the demise of the middle class as they climb into their over-sized SUVs, return to homes that have fewer people living in them yet more rooms compared to their grandparents (on this metric, housing-per-person has doubled in real terms over the past 50 years), and listen to music anywhere they want on their iPhones as they make calls, book dinner reservations, and take their kids to soccer practice.
By virtue of the revolution of satisfied expectations, the Garden of Eden would cause most people to be miserable because of the lack of progress. People need to constantly be moving forward, no matter how successful they currently are in their personal or professional life.
The Cure: Always focus on absolute purchasing power, influence, or stature. Besides, if you want to experience an increase in life situation, invest and harness the power of compounding. By definition, your collective dividends, interest, rents, and profits should increase regularly, albeit sporadically and with a lot of volatility.
Note: Mental models are a technique espoused by Charlie Munger wherein one catalogs and studies models of behavior in psychology, economics, and other disciplines for the purpose of using them to your advantage or guarding against them in business or life. This approach has had an extraordinarily positive influence on my standard of living, the enjoyment I get out of life, and my effectiveness as an investor. From time to time, you will see me add new mental models to a category on the site for my own benefit. You are, of course, free to read them but they are primarily there for my own reference.