Relative Social Status Trumps Absolute Financial Status

I came across a fascinating article a few months ago that I was keeping in my pocket until later. Well, later is here. (Programming note: my series on DFA will start in earnest next week – sorry for the delay.)

The article focuses on trying to explain for the seemingly irrational financial behaviour of people. Here are some fascinating research results:

When asked if they would rather earn $50,000/year when everyone around them made $25,000/year OR earn $100,000/year when everyone around them earned $250,000/year (prices of goods and services were constant) – test subjects said they would prefer to earn $50,000. (Hence the title of this post, pulled from the article.)

Here’s another tidbit pulled from the article:

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.

Amazingly, most people said that they would prefer to be A. In other words, they would rather forgo $50 in order to alleviate the feeling of regret that comes with not winning the thousand bucks. Essentially, they were willing to pay $50 for regret therapy.

There are some other interesting studies and commentary in the article written by Michael Shermer, and originally appearing in the January 13th, 2008 edition of the LA Times.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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  • Richard

    In the first example they can say prices will remain constant but unless the “people around you” are very limited that’s hard to believe. Maybe the average person knows this intuitively isn’t willing to stretch their imagination that far. A more realistic version of the question is “Would you rather be earning $50,000/year in 2000 (when many people are earning more) or in 1800 (when very few people are earning more)?”.

  • MultifolDream$

    I like the phrase “regret therapy”. btw A lot of surveys about peoples psychology regarding money support this article

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