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How to React Diminishing Returns — Carl Richards

The first piece of pumpkin pie is a real treat. The second piece might be good. But we may almost have to force ourselves to eat the third. Instead of enjoying it, we’re miserable. Why doesn’t the last piece taste as good as the first?

We’ve all experienced that moment when our enjoyment of something declines as we have more and more of it. With each additional unit, be it pie or something else, less and less value gets added to our lives. Why doesn’t adding more of something continue to add up to something better?

This concept of declining marginal returns, or utility, is something we often experience; but we rarely recognize when it happens in our lives. In fact, one of my college economic professors felt so strongly about making sure we understood it that she spent almost the entire semester on that single concept.

While there’s no hard and fast rule for how and when we’ll begin to enjoy something less, here are some observations that have stuck with me since that semester.

1. Marginal utility may fall to zero.

Each of us has an inflection point. When you reach this point, you stop getting any return on every additional unit. It’s that moment in time, for example, when the last bite of pie stops adding any pleasure.

2. Marginal utility may go negative.

We call this dissatisfaction. While the cost may be financial, it can also become psychological. You can see it in people with too much money. We know that at a certain point, more money doesn’t equate to more happiness and may have the opposite result. For instance, how many happy stories have you heard about lottery winners five, 10, even 20 years after they win?

But it can be particularly hard to keep our perspective when faced with the chance to buy something new. Last weekend, for example, my wife and I went to buy a new car.

We considered leasing because we liked the idea of a new car every three years, and a new car is nicer than an old car. But the math didn’t add up. No matter how much we love that new-car smell, it will go away at some point. Ultimately, the math and our goal to keep the car for seven to 10 years trumped the value we placed on the feeling of having a new car.

Of course, you might make a different decision, but the important part is that you need to ask yourself this question: What’s this choice really worth to me, knowing that I won’t necessarily feel the same way a month from now that I do today?

Whether it’s leasing a car or buying a new pair of shoes, at some point they’ll no longer be new, and the marginal utility of the car or shoes will probably fall to zero — or even go negative. By recognizing the role of marginal utility, we can avoid the costly mistake of expecting the new shoes we buy today to make us happier than the pair we bought last week.

Even when the decision isn’t about numbers on a spreadsheet, we can make the same mistake when we chase after more because we think it will lead to something better.

Drinking too much water: We’re encouraged to drink more water to help us stay healthy. The amount that makes sense will vary by person and activity, but at a certain point, it stops being a benefit. In fact, drinking way too much water can hurt you. Taking too many vitamins: Your body can absorb only so much of certain vitamins, like vitamin C. After that, it just gets flushed out of your body. In the process, however, megadoses of vitamin C can cause things like headaches, insomnia and kidney stones. Buying too much plastic: Remember how excited you were the first time you gave a set of Legos to your children? That first time was magical. How many sets did it take before the Legos stopped being exciting and you had to come up with something else to impress your children?

Marginal utility can become incredibly expensive, both financially and emotionally. It can lead us to think that if we spend or do a little more that we can get back to the pleasure we experienced the first or second time. As a result, we keep chasing after a moment that may be all but impossible to find.

It may sound odd, but the key to dealing with marginal utility may very well be that we’ll enjoy more if we spend or do less. Then, we can put down the plate, put away our wallets and walk away without regret, knowing that we’ve already reached our high point.

This commentary appeared December 16 on NYTimes.com.

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Carl Richards is the creator of the weekly Sketch Guy column in The New York Times and is a columnist for Morningstar Advisor. Carl has also been featured in The Wall Street Journal, Financial Planning, Marketplace Money, The Leonard Lopate Show, Oprah.com and Forbes.com. His simple but meaningful sketches served as the foundation for his first book, “The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money.”

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