Which is More Important to You: Absolute or Relative Wealth?

Kate Hofmeister – Aparicio Morning – Honorbound

If you were given the choice between two worlds, World A where you earn “$110,000 and everyone else earns $200,000” or World B where “you earn $100,000 and everyone else earns $85,000,” which would you choose?[1] I immediately chose to live in World A, but the more I thought about it, the more appealing World B looked. My first thought was the bigger the pay check, the better. However, when I looked at it as a comparison, I decided it was better to feel wealthier, even though I would be making less money. In this specific scenario, the “majority of Americans would choose B,” showing us that relative income matters when it comes to decision-making. [2]

This scenario, however, does not only apply to incomes. It can apply to any decision where you have two options. For example, if you are looking for a house, would you rather have the best house on the block, or a house worth more but isn’t as nice as the houses around it? Most Americans would choose the first option, or the best of the worst, even though they would not be proud to admit it, thinking it would portray them as envious of others. “If asked whether we fret about the size of our neighbors’ house or about the cars they drive, most of us would insist we do not,” because “most of us are taught from an early age not to worry about how others’ possessions compare with our own.”[3] The people who compare themselves to others believe that “relative income does matter,” while those who would choose the house worth more think that absolute income is more important. [4]

When my brother was deciding on colleges, he had a situation very similar to this, he was recruited for rowing and he was deciding between Brown and the University of Pennsylvania. The Brown crew team is much better than Penn’s but he knew that if he went to Penn, he would be one of the best on the team. He had to decide between being an average rower on a great team or being in the best boat all four years on an average team. He decided that rowing in the best boat was more important to him than the ranking of the team, showing that he often compares himself to others.

Scenarios like this prove that you are either more worried about comparing yourself to others or maximizing your own utility. Many people think it is worth it to “give up a small amount of absolute income in return for a large increase in relative income.”[5] For those who believe this, knowing that their neighbor has more than them, commonly known as relative deprivation, makes them feel the need to buy more big ticket goods, “like housing and cars, in which differences in quality and size are readily visible,” creating a competition between neighbors.[6] Choosing World A, where you are making less than everyone else, but still making more than you would in World B, shows that you are not concerned about comparing yourself to others. However, choosing World B, where you are less wealthy “but richer than everyone else,” shows that you are more concerned about relative wealth.[7]

 

[1] Charles Wheelan, Naked Economics: Undressing the Dismal Science (New York: W. W. Norton & Company, 2010), 144.

[2] Ibid., 144.

[3] Frank, Robert H. “Why Living in a Rich Society Makes Us Feel Poor.” The New York Times. October 15, 2000. Accessed June 22, 2017. http://partners.nytimes.com/library/magazine/home/20001015mag-frank.html.

[4] Charles Wheelan, Naked Economics: Undressing the Dismal Science (New York: W. W. Norton & Company, 2010), 144.

[5] Ibid., 144.

[6] Gross, Daniel. “Robert Frank: How Rising Inequality Harms the Middle Class.” Economist’s View. August 4, 2007. Accessed June 22, 2017. http://economistsview.typepad.com/economistsview/2007/08/robert-frank-ho.html.

[7] Charles Wheelan, Naked Economics: Undressing the Dismal Science (New York: W. W. Norton & Company, 2010), 144.

Image Citation: “Why and How to Stop Comparing Yourself to Others?” Inspiration to Change Your Life. Accessed June 23, 2017. http://infoselfdevelopment.com/why-and-how-to-stop-comparing-yourself-to-others/.

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