Wealth Comparisons are Weird

Posted by Maneesh Sethi :: April 17, 2008 @ 7:02 am

Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000? Assume for the moment that prices of goods and services will stay the same.

This question has been asked by researchers in the past, and the answer is always astonishing. An LA Times article explored this phenomenon and further described other weird ways that people think about money.

For example, looking at the above question, it seems only rational that people would want to earn $100,000, right? I mean, that’s twice as much as $50,000, and if prices are the same, that means your absolute standard of living will be twice as high!

However, research has shown that most people will choose the opposing option: They would rather earn $50,000 as long as they are making more than other people. Their absolute standard of living isn't important to them--only their comparative standard. Rationally, this doesn't make sense, but humans aren't always rational.

Another situation described in the article involves the following question:

Would you rather be A or B?

A is waiting in line at a movie theater. When he gets to the ticket window, he is told that as he is the 100,000th customer of the theater, he has just won $100.

B is waiting in line at a different theater. The man in front of him wins $1,000 for being the 1-millionth customer of the theater. Mr. B wins $150.

People are willing to lose $50 just to avoid having the person in front win more money than they do.

The article continues on to give an evolutionary explanation for why people prefer to think comparatively rather than absolutely. Regardless of the reasoning, it still shows that financial thinking is not always rational. It also explains why some people will go bankrupt just to be able to show off their house or car. It reminds me of one of my best friends, whose aunt and uncle were going bankrupt and were about to lose their house but continued buying expensive furniture so that they could show it off to their relatives.

The thing that scared me the most was that I wasn't sure of my answer to the two questions above. I'm not even sure how rational a consumer I am. How rational are you?