Why Half of Us Would Choose to Earn Less Money

With all else being equal, which scenario would you choose?

A. Live in a town where the median salary is $50,000 but you make $100,000 per year.

B. Live in a town where you make $200,000 per year but the median salary is $300,000.

It looks like an easy answer, scenario B.

In both scenarios, everything about your life is the same except your salary is double in scenario B. The median salary information is superfluous it has no bearing on your life. How much your neighbor makes should not affect your life in any way.

But it does.

Harvard researchers asked subjects the same question and 50% preferred scenario A. The subjects choosing scenario A are willing to earn less money on an absolute basis to rank higher socially on a relative basis.

The subjects choosing scenario A want their peers to be envious of them. Envious of their extra money and all the things that extra money could buy. They’re avoiding scenario B because they know they would envy their peers.

The Psychology of Money by Morgan Housel

Capitalism didn’t create envy. It’s been with us since the dawn of humankind.

It’s possible that envy was useful to our early survival. It’s a form of social comparison. By watching those who had more resources than us, we could learn how to obtain them for ourselves and ensure our own survival and the survival of our offspring.

But society evolved faster than we did and money is THE resource. It is how we obtain everything we need to survive. And for the majority of people today, life is no longer a daily struggle to find food and survive. The one potentially beneficial aspect of social comparison is no longer relevant but we haven’t evolved fast enough to escape its harmful aspects.

It’s far too easy to compare ourselves to others especially when money is involved. The problem is there will always be someone who makes more money than you. Measuring yourself to others on a relative basis is a recipe for unhappiness and harming your financial future. When you measure yourself on a relative basis to your peers you run the risk of spending unnecessarily on improving the outward appearance of your social status, at the detriment of your long-run financial security.

Instead, measure yourself on an absolute basis. More than likely you’ll find you have all of your “needs” covered and plenty left over for your “wants” too. Indulging your “wants” is important, as it wouldn’t be healthy to live like a miser either. However, being cognizant of the “envy effect” can help you focus on spending your hard-earned money on what matters most to you and your family.