Don’t spend extra to move up a tier among people around you — bigger home, car, or circle

Holding income equal, the more neighbours earn, the lower this person’s reported happiness. It mainly shows up with neighbours of the same education level, and more clearly in people who often deal with neighbours. So money spent to move into a place where everyone is better off than you buys moving yourself down a tier. But when incomes rise together, people still feel better off.

Cost

No money. All you need before raising the budget is one extra question: does this mark-up buy the thing itself, or your place in this group? The hard part is not following when everyone around has upgraded.

Benefit

The U.S. National Survey of Families and Households (NSFH) revisited the same people in two waves. The authors matched it to local average income. Local average income (PUMA) was estimated from a 5% sample of the 1990 census. After subtracting own income and a set of personal traits, the result was: higher neighbour income, lower self-reported happiness. The effect is large, stable under other calculations, and highly significant. The authors’ phrasing is that the happiness drop from “neighbour income rising” is on the same order as from “own income falling by the same amount.” Comparing the same person to themselves over time (individual fixed effects), the coefficient’s direction stays and its size is similar; significance only falls to the 10% level. Restricting comparisons to the same state and the same survey wave (state and wave fixed effects), results barely change. So it is not that “people who like moving to poor places are happier anyway,” nor unmeasured state-level factors. The effect is stronger in people who often deal with neighbours and not significant in people who only deal with friends outside the community. Renters and owners did not differ, which does not support “expensive areas have high house prices so spendable money is less.” Happiness falls only with income of same-education neighbours; income of differently educated neighbours barely registers. And it mainly travels through “satisfaction with one’s own material situation,” not through satisfaction with family life or other domains. Finally, if own and neighbour income rise by the same proportion, happiness still rises.

Notes

Reasons for grade B: the data are repeated surveys of the same people, there is only this one study, and the sample is abroad. The outcome is self-reported happiness, not money. The authors did use statistics to drop several confounds — same person over time, same state and wave — but it is still not a randomized trial. There is no citeable counterpart for a Chinese population. Benefit magnitude is set to “medium,” following Item 23 in this section (don’t expect shopping to improve mood). The money saved may well reach the 10000-yuan level. But “how much happiness that saved money buys” has no number behind it, so it is not recorded as “large” on a 10000-yuan scale. This does not oppose spending for a larger home, a quieter compound, or a shorter commute — those buy the thing itself. What to stop is the single reason “colleagues all upgraded; I cannot fall behind.” How to rank a place to live: Section 4, Item 18 (put commute time first when choosing where to live). Buying things to regulate mood: Item 23 in this section. Constantly comparing upward online: Section 3, Item 20 (don’t treat “how others are doing” as required daily reading).

Sources · 2

1. Luttmer EFP (2005). Neighbors as Negatives: Relative Earnings and Well-Being. The Quarterly Journal of Economics, 120(3), 963–1002. 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）. nber.org/papers/w10667