Don't spend more on a home, car or social circle to “move up a notch among the people around you”

Cost

Free. All you have to do is ask one more question before adding to the budget: is this extra charge buying the thing itself, or my position in this group. The hard part is not following when everyone around you has upgraded.

What you get

The U.S. National Survey of Families and Households (NSFH) re-interviewed the same people in two waves. The author matched this data to local average income. The local average income (PUMA) was estimated from the 5% sample of the 1990 census. After removing the person's own income and a set of personal characteristics, the result was: the higher the neighbors' income, the lower the person's self-reported happiness. This effect is large, holds up under a different way of calculating, and is highly significant. The author put it this way: the drop in happiness from a rise in “neighbors' income” is of the same order of magnitude as that from an equal fall in the person's own income. When the comparison was changed to the same person against themselves over time (this is called adding individual fixed effects), the sign of the coefficient stayed and the size was similar, with significance falling only to the 10% level. When it was further limited to comparisons within the same state and the same survey wave (this is called adding state and wave fixed effects), the result was basically unchanged. This shows it is not caused by “people who like moving to poorer places being happier to begin with,” and not by some unmeasured state-level factors. The effect is stronger in people who often see their neighbors and not significant in people who only see friends outside the neighborhood. Renters and homeowners showed no difference, which does not support the explanation that “expensive places have high housing prices, so there is less money actually left to spend.” Happiness falls only with the income of neighbors with the same education, and hardly responds to the income of neighbors with different education. And it works mainly through “satisfaction with one's material situation,” not through satisfaction with other areas such as family life. Finally, if the person's income and the neighbors' income rise by the same proportion together, happiness still rises

Notes

There are several reasons it is rated B: the data come from a questionnaire that repeatedly re-interviewed the same people, there is only this one study, and the sample is from abroad; the outcome is the respondents' self-reported happiness, not money. The author did use statistical methods to rule out several kinds of interference, such as comparing the same person over time and comparing within the same state and wave, but in the end it is not a randomized trial. There is also no comparable data for people in China to cite. The size of the benefit is rated “medium,” following the approach of §6.23 (don't count on buying things to improve your mood). The money saved may well reach the tens of thousands of CNY (万元) level. But there is no number behind “how much happiness that saved money buys,” so it is not recorded as “large” at the tens-of-thousands level. This does not argue against spending on a bigger home, a quieter neighborhood or a shorter commute; those buy the thing itself. What it blocks is the one reason “everyone at work upgraded, and I can't look worse than they do.” For how to rank places to live, see §4.18 (put commute time first when choosing where to live). For using purchases to manage mood, see §6.23 (don't count on buying things to improve your mood). For always looking upward online, see §3.20 (don't make “how others are doing” daily required reading)

Evidence grade

B : Supported by research but without a precise number, or based on small or single studies.

Sources

1. Luttmer EFP (2005). Neighbors as Negatives: Relative Earnings and Well-Being. The Quarterly Journal of Economics, 120(3), 963–1002. https://doi.org/10.1093/qje/120.3.963
2. Luttmer EFP (2004). Neighbors as Negatives: Relative Earnings and Well-Being. NBER Working Paper No. 10667（本条引用的表述与数量级按这一版逐字核对）. https://www.nber.org/papers/w10667

Translated from the Chinese original. Original book, section 6, tip 24. Content may be out of date and rules differ by place. When you actually deal with an agency, a doctor or a court, follow what local officials, doctors and lawyers tell you. Disclaimer