Saturday, June 7, 2008

The poor rich

Extracted from ST online
June 4, 2008
Would you prefer to live in a world where you earn $60,000 a year while those around you average $40,000, or one in which you earn $100,000 but everyone else gets $200,000?

Robert H. Frank, professor of economics at Cornell University, says that most people find the first option more attractive. When it comes to salaries, we care more about relative size than absolute size. What matters most is earning more than our neighbours.

The same holds true for all sorts of things. The actual size of our apartment matters less than its size compared to everyone else's. And most of us will settle for a modest car - provided our neighbour is driving something worse.

Prof Frank labels things like salaries, houses and cars as positional goods, whose defining characteristic is that the amount of satisfaction we get from them is strongly influenced by comparison with what others have.

The American essayist H. L. Mencken hit the nail squarely on the head when he defined wealth as 'any income that is at least one hundred dollars more a year than the income of one's wife's sister's husband'.

It is a sobering thought. We assume that getting a pay rise, or moving into a new apartment, or trading-up to a better car will bring us increased levels of happiness and satisfaction. In fact, many of us simply raise the bar on what counts as adequate.

We work longer hours, earn more, spend more and consume more. Meanwhile, everyone else does the same. So, by comparison, we are no better off, and therefore no happier.

After German reunification in 1990, living standards in East Germany increased dramatically. Despite this, happiness levels actually fell. The East Germans were better off, but began to compare themselves unfavourably with the more affluent West Germans.

But not all goods are positional. Try answering this question: Would you prefer to live in a world where you have two weeks' vacation while those around you average one week, or a world in which you have four week's vacation but everyone else gets six weeks? Most people prefer the second option. With vacation time, the absolute amount is more important than the relative amount.

The same holds true for things like health and marriage. The satisfaction we derive from them is not strongly influenced by a comparison with those around us. Our enjoyment of good health is not spoiled by the knowledge that our colleagues are also fit and well. We do not enjoy our marriages any less because our neighbours are happily married.

Prof Frank labels things like vacation time, health and marriage non-positional goods.

The problem we face, as individuals and as a society, is that the balance of our lives can all-too-easily become shifted too much towards the acquisition of positional goods rather than non-positional ones. Our tendency to compare ourselves to others on things like salary, house and a car, can make us spend too much time and energy in pursuit of them.

Research suggests that most Americans would be healthier and happier if they worked fewer hours. But the relentless desire to keep up with the Joneses prevents them from doing so.

All too often, we base decisions on a flawed theory of happiness that puts undue emphasis on positional goods. We sacrifice leisure time and family time to stay in the rat race.

British economist Richard Layard and the author of Happiness: Lessons From A New Science, puts it succinctly. 'Most people are not rivalrous about their leisure. But they are rivalrous about income, and that rivalry is self-defeating. There is thus a tendency to sacrifice too much leisure in order to increase income.'

I used to teach in a primary school. I had a colleague, a middle-aged woman who often complained that the demands of teaching full-time and looking after a family left her feeling stressed out and exhausted. She often talked about going part-time. Since her husband earned a good salary, she could have afforded to do so.

Then, a part-time job came up at the school where we worked. To my surprise, she didn't apply for it - she had decided to build an extension to her house and needed to work full-time in order to pay for it.

It seemed to me that she had traded quality of life for double-glazing. It is a trap we can all very easily fall into.

Gary Hayden is a freelance writer who specialises in education, science, philosophy, health, well-being, travel and short fiction.
Sgbluechip says: Gary's article is simple, direct yet philosophical. Indeed, while we are on our journey to financial freedom, remember the goal behind it is to be happy ultimately. It would be pointless to gain everything in the world only losing happiness in the process.

We all hate the rat race, the unreasonable boss, the backstabbing colleagues, the overwhelming workload, the miserly pay and the uncontrollable inflation. Financial freedom can put an end to all the above. But remember not to lose yourself when you have reached the end and forget who you are in the beginning.

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