Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why You Feel Poorer Than Your Friends
Transcript
- Lucas: Luna, I want to start with a question: have you ever felt a little pang of envy — maybe a friend buys a house, or gets a promotion — and suddenly your own salary feels smaller, even though nothing about it changed? Luna: Absolutely. It's like your brain instantly recalculates your worth based on what they have. And it's not rational — you know that intellectually, but the feeling is real. Lucas: That feeling has a name: relative deprivation. And it's one of the most powerful — and underappreciated — forces in how we think about money, happiness, and economic fairness. Luna: Relative deprivation — so it's not about absolute poverty or wealth, but how you stack up against some reference group. Lucas: Exactly. And the classic study that introduced this concept goes back to World War Two. A sociologist named Samuel Stouffer surveyed American soldiers to understand morale. He found something that surprised him. Luna: What did he find? Lucas: Soldiers in units with faster promotion rates were actually less satisfied with promotion opportunities than soldiers in slower units. Even though they got promoted more often, they compared themselves to peers who got promoted even faster. Their reference group was the guy next to them, not some abstract standard. Luna: So a rising tide lifts all boats, but if your friend gets a speedboat, you still feel like you're rowing. Lucas: Right. And this applies directly to economics. There's a famous paradox called the Easterlin Paradox, named after economist Richard Easterlin. He showed that within a country, richer people are happier than poorer people — but across countries, average happiness doesn't rise much with average income beyond a certain point. Luna: Meaning once your basic needs are met, more money doesn't buy more happiness — because everyone around you also gets richer, and you're stuck on the same relative treadmill. Lucas: Exactly. And studies since have refined it, but the core insight holds: our satisfaction depends heavily on how we compare to people in our social circle, our industry, our neighborhood. Luna: This is the kind of thing that makes listeners think about their own spending. And if walking through the economy with us has made something click for you — maybe a bias you now recognize in yourself — it's worth mentioning that listener support is what keeps this show ad-free. If you'd like to help, you can find us at buy me a coffee dot com slash fexingo. No pressure, just a simple way to say thanks. Lucas: And we genuinely appreciate that. Now, back to relative deprivation — there's a really concrete example in the labor market. Think about CEO pay. In the 1960s, CEOs earned about 20 times the average worker. Today, it's closer to 300 times. But a CEO doesn't compare their salary to the janitor — they compare it to other CEOs. Luna: So the reference group shifts upward, and suddenly a 'good' salary is defined by what your peers make, not what your company can afford. Lucas: Precisely. And that dynamic can drive compensation spirals. Each CEO wants to be in the top half of the peer group, so boards keep paying more. It's a classic arms race driven by relative deprivation. Luna: I've also seen this play out in personal finance advice. People say 'you should save 15 percent of your income' — but if your friends all save 5 percent, saving 15 percent feels like a sacrifice. Meanwhile, if your peer group saves 25 percent, you feel behind. Lucas: That's a great point. Social norms around saving and spending are incredibly sticky because of comparison. There's a 2018 study from the National Bureau of Economic Research that looked at how people's happiness changed when their income increased — but only if their neighbors' income didn't rise as much. Luna: So you're happy getting a raise, unless your neighbor gets a bigger one. Lucas: Exactly. And the effect is asymmetric. Losing ground relative to others hurts more than gaining ground feels good — which ties back to loss aversion, which we covered in Episode 13. Luna: Right — losses loom larger than gains. So relative deprivation feels like a loss, even if you're objectively better off. Lucas: Yes. And this has implications for public policy too. When economists talk about inequality, they're often focused on absolute measures — the Gini coefficient, income percentiles. But relative deprivation gets at the lived experience. People don't walk around with a spreadsheet of national income data. They look at their Facebook feed. Luna: Social media amplifies this so much. You're seeing curated highlights — the vacation, the new car, the promotion — and your brain treats that as the norm. Lucas: There's actually a 2022 study from the Journal of Economic Behavior and Organization that linked social media use to higher levels of relative deprivation. The more time people spent on platforms like Instagram, the more they felt their own financial situation was inadequate — even controlling for actual income. Luna: So the reference group becomes an algorithmically optimized highlight reel. No wonder we feel poorer than our friends. Lucas: And this isn't just about feelings — it affects real economic behavior. People take on more debt to keep up appearances. They buy houses they can't really afford, finance cars they don't need. The 'keeping up with the Joneses' effect is well documented. Luna: I remember a study that looked at lottery winners. They found that winning a large sum didn't increase happiness as much as people expected — partly because winners often moved to wealthier neighborhoods and then felt relatively deprived again. Lucas: That's the hedonic treadmill at work — you adapt to your new level, but your reference group shifts too. If you win $10 million and move to a neighborhood where everyone has $50 million, you're back to feeling average. Luna: So what's the takeaway? How do we escape the comparison trap? Lucas: One suggestion from behavioral economists is to consciously choose your reference group — or better yet, compare yourself to your past self rather than to others. Track your own progress over time. Luna: That's easier said than done, but it's a good mental hack. Also, limiting social media exposure — at least being aware that what you see is a biased sample. Lucas: Another approach is to focus on experiences rather than possessions. There's a lot of evidence that experiential purchases — travel, concerts, classes — generate more lasting happiness than material goods, partly because they're less subject to social comparison. Luna: Because you can't easily compare a trip to Patagonia with a trip to Bali — they're different experiences. But a car or a watch is easy to compare. Lucas: Exactly. So relative deprivation is a powerful lens for understanding why we feel the way we do about money — and it's not just personal. It shapes everything from consumer spending to political attitudes about taxation and redistribution. Luna: It makes you wonder: if we all understood this bias better, would we make more rational financial decisions? Lucas: Maybe. At the very least, recognizing that the feeling of being behind is partly a cognitive illusion — driven by who you compare yourself to — can help you step back and assess your own situation more objectively. Luna: So next time I feel that pang of envy, I'll remind myself: it's just relative deprivation, not a real signal about my financial health. Lucas: And maybe take a look at your own progress over the last year. That's a comparison that actually tells you something.