Playing the Status Game
Sometimes protecting and building wealth is more psychological and social than financial.
“You Think You’re Doing Fine in Life, Until You Hear a Friend Is Doing Better,” goes a recent headline from The Wall Street Journal. As much as we might prefer it otherwise, life, unfortunately, does not occur within a vacuum. We do not conceptualize ourselves solely on an absolute basis. Comparisons, whether welcome or not, inevitably happen. Despite my best efforts, I am constantly comparing myself to other writers as I read, and sometimes not favorably. However, the damage is limited to just an occasional bruised ego. When it comes to money though, comparison can have far more severe repercussions. This all-too-human impulse, if not properly controlled, can be a major impediment to protecting and building wealth.
The full extent of this problem is significant. An extensive body of research shows that happiness is, to at least some extent, driven by relative income comparisons. Most people would prefer a lower level of absolute income so long as they made more money than their neighbors. If given a choice between making $250,000 in a neighborhood of $500,000 earners or making $100,000 in a neighborhood of $50,000 earners, many would choose the latter. This is the core of the relative income hypothesis, identified by economist James Duesenberry in 1949.
We all intuitively understand this. Many products and businesses – whole industries even – are based around the intrinsic human desire for status. A $25 Casio tells time just as well as a $25,000 Rolex, but the Rolex tells a whole lot more in addition. This dynamic is pretty much true of all luxury products. At the extreme, luxury products become what economists call Veblen goods. Contrary to normal products, where demand falls as the price rises, demand for Veblen goods rises as the price rises. We would all drive Bugattis if we could afford one, but a good portion of those of us who can’t would pass on the Chevy if offered other choices.
Unique to our current age, social media has only intensified the status game. For better or worse, social media makes it easier than ever to compare yourself to others. More pernicious, social media makes it easier than ever to tightly control your image and show only your best side rather than the whole picture. It is much easier to hide things digitally than in person. Comparison has become a feature of the business model, driving user engagement with the platform that can then be sold to advertisers. Twenty-five years ago, if you had told someone that you are an “influencer” they might have looked at you like you were under the influence. Now it is a respectable profession.
Why, though, do we allow others to hold such sway over how we feel? The answer goes way, way, way back. Homo sapiens, like most animals, have evolved, to one degree or another, to be sensitive to social hierarchies and care deeply about status. There are many reasons for this, but it likely comes down to demonstrating fitness in a selective mating environment. Like it or not, at a certain level you’re not that different from that silly bird you saw on Planet Earth.
In more advanced organisms, with larger brains and pre-frontal cortexes, group dynamics come into play. Alone against nature, and often other groups, your odds of survival are not high. Better then to pursue the appropriate status and demonstrate the correct behavior to benefit from inclusion in a group.
As deep as the tendency for comparison runs, it can be counterproductive in the modern world. There are simply too many variables at play. Nothing is like-for-like. When you compare you know everything about yourself, but only what you can see about the other person, not what you can’t. Any conclusion is irredeemably flawed.
With respect to protecting and building wealth, our natural tendency toward comparison can create tremendous long-term damage. Overspending to show unearned status, whether to brag or to keep up with others or to fit in with the group, is never advisable. Sure, your neighbor bought a fancy new car, but are they saving enough for retirement? Perhaps. Or perhaps not. No reason for you to do the same for certain.
The alternative then is to educate yourself and stick to your own investment plan. With my apologies for the following act of shameless self-promotion, regularly reading Investment Insights is a good start. Know why there is a tendency for comparison and when that can become counterproductive. Know also that no investment outperforms all others at all times. Everyone looks relatively bad by comparison at some point. No matter your success, there will always be a hot investment or stock you don’t own. Perhaps you missed out on NVIDIA. Or Bitcoin. Or the ARK Innovation ETF. The list could go on and on.
Someone will always be making more money than you, but you shouldn’t worry about this because you don’t know the whole story. Was it luck, skill, both or something else altogether? There is no way to know. Any comparison is flawed.
Fortunately, you don’t need to own every hot stock or best all others year in and year out to successfully protect and build wealth. That’s not how compounding works. All you need is discipline, patience and time, easy things within our complete control. Yet, at the same time, discipline, patience and time are extremely difficult. Sometimes it seems our own biology works against us. We evolved to seek status, yet investing is an act of deferring status, or at least the visible forms of status that matter most.
This alternative approach is better because it refocuses you on the only thing that matters, the long term. Doing so does not eliminate comparison, but rather redirects your energies to a better comparable. For protecting and building wealth, compare yourself only to where you’ve been and to your plan to get where you want to be (and use the proper perspective when doing so). Personally, compare yourself only to who you have been and to your plan to be who you want to be. This is the only correct comparison and the only one that you should respect. Give no other comparison any power over how you feel or act, unless it is by choice.
This is not to say comparing yourself to others is all bad, nor should you feel ashamed of doing so. It may not be something that we can fully control. Sometimes an unpleasant comparison can motivate necessary change and growth. The ideal we should seek is balance and perspective, with your higher-level intelligence helping your baser tendencies work for you rather than against you.
Protecting and building wealth is an infinitely complex endeavor that spans disciplines. It is as much psychological and social as it is financial. It often requires overriding deep-seated behaviors developed for success in a different type of world from the past that are not needed, and often outright counterproductive, in our world today. This requires knowledge and understanding to keep yourself on the right path. You don’t have to ignore everyone and everything else to succeed, just make sure that you are comparing yourself and your progress against the right guideposts the right way during the journey.
Thoughts? I would love to hear them. Email me at investmentinsights@zuckermaninvestmentgroup.com.
Written By Keith R. Schicker, CFA
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