“Keeping up with the Joneses” is as popular a phrase in the personal finance community as “spend less than you earn” and “compound interest.”
It’s true – we like to compare ourselves to others. Your neighbor buys an Audi A4 so you feel obliged to buy the new Audi A6. Your close friend goes on a vacation to Bora Bora, and you soon after book your plane tickets to the Maldives. But comparison leads to disappointment, as you will always find someone who has more than you do. We often compare ourselves to others in many different aspects in life, whether it be height, weight, job title, house square footage, and, of course, salary.
If I asked you whether you would like to earn $70,000 per year or $80,000, the answer would be obvious. However, psychologists found that more people would prefer to make $70,000 per year when others were making $60,000, then to make $80,000, when others were making $90,000. I find this conclusion fascinating. In other words, most people would agree to have a lower salary, as long as others were even poorer.
Another study by Zizzo & Oswald took this idea even further trying to answer the following question… Are people willing to pay to reduce others’ incomes?
“Our aim is to see whether people dislike other individuals’ wealth sufficiently that they would be willing to pay some of their own money to reduce it. We find that the answer is yes: our laboratory subjects are willing to give up money to reduce perceived inequities. Sometimes they are willing to do this even when it is very expensive to reduce other people’s cash holdings. This appears to be strong evidence for the existence of some kind of envy or concern for fairness.”
So people would accept a significantly lower wage so that they are making more than their neighbor AND would pay to reduce the income of others. We care more about how much we have compared to others than we do about how much we have in absolute terms.
Humans are economically self-interested, but we are also willing to sacrifice some self-interest to ensure that we have more than others. Because in the words of Charles Kindleberger, “there is nothing as disturbing to one’s well-being and judgment as to see a friend get rich.” We can not let our ego become one of our biggest enemies to building wealth.