Why 100K of My Followers Lied……
Recently, I posed a question to my followers: Would you prefer earning $1 million while your friends earn $2 million (Option 1), or earning $750,000 while your friends earn $500,000 (Option 2)? Almost 80% of the 100k viewers of the post chose Option 1, suggesting they value absolute income. But here’s the kicker: they likely lied.
The Real Deal: Relative Income
In 1998, researchers Sara Solnick and David Hemenway conducted a groundbreaking study that unveiled a fundamental truth: people care more about their income relative to others than about their absolute income,The findings revealed a strong preference for relative standing over absolute gain. For example, many participants preferred earning $50,000 if others earned $25,000 over earning $100,000 if others earned $200,000. The results were striking: many participants preferred to earn less if it meant they would earn more than those around them.
This indicates that people derive significant utility from their income relative to others, highlighting the impact of positional concerns on decision-making (SpringerLink).
A house may be large or small; as long as the neighbouring houses are likewise small, it satisfies all social requirements for a residence but let there arise next to the little house a palace, and the little house shrinks into a hut. The little house now makes it clear that its inmate has no social position at all to maintain, or but a very insignificant one; and however, high it may shoot up in the course of civilization, if the neighboring palace rises in equal or even in greater measure, the occupant of the relatively little house will always find himself more uncomfortable, more dissatisfied, more cramped within his four walls (…) Our wants and pleasures have their origin in society, we do not measure them in relation to the objects which serve for their gratification. Since they are of a social nature, they are of a relative nature (Marx, 1849).
The Psychology Behind It
Humans are inherently social and competitive. Economist Robert H. Frank explains, “People care deeply about their relative position because it affects their ability to secure life’s necessities and enjoy its luxuries.” This means that our satisfaction isn’t just about how much we earn, but about how our earnings compare to those of others.
Data Speaks: Global Confirmation
Research around the globe supports Solnick and Hemenway’s findings:
- Costa Rica: A study by Alpizar et al. (2005) found that individuals preferred relative gains over absolute gains, mirroring the preferences observed in the Solnick and Hemenway study. Participants showed a strong inclination toward scenarios where they earned more than their peers, even if it meant lower absolute income.
- China: Carlsson and Qin (2010) conducted similar research in China and found consistent results. Participants valued their income relative to others highly, indicating that positional concerns are a significant factor in economic decisions across different cultures and contexts.
- USA: Solnick and Hemenway’s original study involved a diverse group, including students from Harvard University. Their findings revealed that people consistently preferred relative income over absolute income, further highlighting the universal nature of these concerns.
Real-Life Implications
In the workplace, employees often express dissatisfaction not because they are underpaid, but because their peers earn more. For instance, in Silicon Valley, tech workers earning high salaries still feel discontent if they perceive their peers are earning even more. This can lead to decreased productivity and higher turnover rates. Addressing these concerns by ensuring equitable pay can improve job satisfaction and performance.
Social Media Influencers: Influencers often experience the pressure of relative income. A well-known YouTuber once shared how earning significantly less than peers despite similar effort led to feelings of inadequacy. Understanding this dynamic, platforms now encourage fairer revenue-sharing models to support mental well-being among creators.
Housing Markets: In cities like San Francisco, relative income affects housing choices. People might choose smaller homes in more prestigious neighborhoods over larger homes in less affluent areas. This decision is driven by the desire to maintain social status, even if it means compromising on living space.
In society, high income inequality often correlates with higher rates of crime, poorer health outcomes, and reduced social cohesion. For example, in the United States, regions with higher income inequality tend to have higher crime rates and poorer health outcomes. Policies aimed at reducing this gap can lead to a healthier, more stable society.
Why It Matters
Individuals: Understand that your happiness may be more about how your income compares to others rather than the absolute amount. This awareness can help manage expectations and focus on genuine contentment.
Corporate Pay Designers: Recognize that fair and transparent pay structures are crucial. Disparities in pay can lead to dissatisfaction, decreased morale, and lower productivity. Addressing these concerns can foster a more harmonious and motivated workforce.
Government Policy: Reducing income inequality can significantly impact societal well-being. Policies aimed at narrowing the income gap, such as progressive taxation and social welfare programs, can enhance overall happiness and social stability.
Conclusion
Understanding the impact of relative income is crucial for everyone, from individuals planning their careers, to corporations designing pay structures, to governments crafting policies. It’s not just about how much you earn, but how your earnings compare to those around you. Recognizing this can lead to more effective strategies for enhancing satisfaction, productivity, and societal well-being.
So, the next time you consider your financial goals, remember: it’s not just about the numbers in your bank account, but how those numbers stack up against your peers. And perhaps, with this understanding, we can all strive for a more balanced and fulfilling approach to wealth and success.
Final Thought
As Nobel Prize-winning economist Richard Thaler puts it, “Humans are not only less rational than homo economicus, but they are also nicer and more concerned about fairness.” This concern about fairness and relative standing is a powerful force in shaping our happiness and decisions. Let’s acknowledge it and use this insight to create a more equitable world.