Perception Matters

“I’ve heard Warren say a half dozen times, ‘It’s not greed that drives the world, but envy.'” – Charlie Munger

This experiment is fascinating:

That little guy was perfectly happy doing his job and getting rewarded with cucumbers right up until the guy next door got a grape. This is one of my favorite experiments because (a) monkeys are hilarious and (b) it says a lot about how much perception can affect our view of reality when incentives are involved.

People are constantly comparing themselves to others when they evaluate their own situation. In one study Harvard researchers asked subjects if they would rather live in a place where they had income of $50,000, but the average person had an income of $25,000 or one where they have an income of $100,000 in a place where the average income was $200,000 (assuming prices were constant in both examples).

In the end 52% of the respondents preferred the $50K scenario. These people would accept half as much money in absolute terms as the second option just so they could make twice as much as their neighbors. This sounds crazy, but it’s difficult for people to look at their circumstances on a stand-alone basis. Everything is relative these days and we’re only as good as the next person we compare ourselves to.

Unfortunately, perception matters when money is involved. The problem is that there will always be someone getting richer at a faster pace than you are. Stating the obvious, this is not a great way to live your life.

 

Download PDF

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

What's been said:

Discussions found on the web
  1. RICARDO commented on Nov 13

    The bigger house, the fancier car, the bigger TV & sound system, the golf club membership, etc.
    Even when the credit card is maxed out.
    Yes, perception matters. And it is the downfall of many rich and poor. It is just that the rich fall from higher up and hit the ground a lot harder

    • Ben commented on Nov 13

      Good point. It’s a harder mountain to climb and the fall can be much further. It’s very difficult to get away from this mindset though.

  2. Art commented on Nov 13

    The question the Harvard study poses can be looked in an alternate way. The actual -people- will be different in a neighborhood where the average person has 25,000 vs 200,000. The politics, world views, and tastes of people making 25,000 and 200,000 are often in stark contrast to one another. What if the responders in the study feel closer in sentiment to people with a smaller net worth? Additionally the texture of a high net worth neighborhood is very different than the texture of a low net worth one. The kinds of businesses and shops that are present differ greatly in well-off versus baseline income neighborhoods. Maybe responders would prefer to live in a place where there are less salons and fancy boutiques and more dive bars and hole-in-the-wall restaurants? Which actually leads to a third point, that of it -costing more- to live in a higher net worth neighborhood versus a lower net worth one, so that 50,000 would go much farther in a 25,000 neighborhood than 100,000 in a 200,000 one.

    • Ben commented on Nov 13

      Valid. Said another way – people are complex.

      • Art commented on Nov 17

        Just came across this doc: https://www.youtube.com/watch?v=t1MqJPHxy6g

        In the first few minutes he talks about comparing ourselves with others. He (de Botton) has also written a book by the same name, on which this documentary seems to be based.

        • Ben commented on Nov 18

          Thanks. I’ll take a look. I follow him on Twitter and have read some of his pieces in the past.. Brilliant guy.

  3. John C commented on Nov 13

    It’s all about René Girard and Mimetic Desire. We borrow our desires from others and compare ourselves to them. We aren’t in charge of our selves as much as we are reactively judging ourselves versus others.

    Love your blog, Ben. You are the best new blogger to come down the pike in the last year or so.

    John C

    See my post:
    René Girard and Mimetic Desire: Imitation and Envy Are the Keys to Human Behavior
    http://zoneofcompetence.com/2014/08/31/rene-girard-and-mimetic-desire-envy-is-the-key-to-human-behavior/

    • Ben commented on Nov 13

      Interesting ideas to ponder. Difficult to do but some good advice I got once was compare yourself only to your former self to make sure you are always improving.

      Thanks for the kind words on the blog. I appreciate the feedback.

  4. Would You Rather… The Joneses Edition | Budgets Are Sexy commented on Nov 21

    […] one of my newer favorite blogs, A Wealth of Common Sense, and one of the articles Ben wrote was on a study that Harvard researchers did on how people (and monkeys!) compare themselves to others. They asked this same salary question to […]