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I have been developing another mental model of this. I think that we naturally measure our own lifestyles by looking at the people around us. We want to feel li

I have been developing another mental model of this. I think that we naturally measure our own lifestyles by looking at the people around us. We want to feel like we're beating the average or at least not too far below average. People we encounter in our lives will try to present themselves as positively as possible, so we end up thinking that their lives are a bit more prosperous than they really are. I think this is where most of the pressure to increase our standard of living comes from. Then you bring in competition for resources. If everyone makes similar amounts of money and everyone is trying to have a similar quality of life, we will tend to spend 100% of our incomes on our cost of living. Just like how perfectly competitive companies will naturally compete away all profits, competition for housing, education, healthcare, etc. will naturally compete away all personal savings until the average savings rate is near zero. The only way out of this competition trap is to find some way to escape the average. Either find a way to make much more money than normal, be much more frugal than normal, or be much luckier than normal.

lonelappde 7y ago
That's "Keeping up with the Joneses". The way out of it is with cognitive training / therapy to have a healthier outlook on your life, and/or learn to hate everyone trying to sell you stuff.
abecedarius 7y ago
I think this model is on the right track, though I'd change "quality of life" to "positional goods and signaling games". Not all of quality of life is from doing better than other people in your reference set, else FIRE would be an unreasonable goal for middle-class workers. It's interesting to think about how to reduce the prevalence/cost of these games.
kgwgk 7y ago
The average is not really that important. As long as your income is not at the lower end of the distribution it’s a just a matter of choice to live as if your income was lower than it is (except in the cases where you would have access to subsidies if your income was actually lower).
- oposa 7y ago
  I have found this to be distinctly not true. I don't know of many places were living a more modest life is a good choice. It seems like most people who says this have already benefited from cheaper education, real estate, their partner or career. In many countries average savings doesn't keep up with the increase in property values, especially not in attractive job markets. If you don't have wealth, or go into debt, you are falling behind. I really don't see it, maybe you have some example?
  - CWuestefeld 7y ago
    I think the kind of things you're talking about are more exceptions, and probably don't matter as much to a given family in the long run. For example, once I've managed to buy a house, that's a stake in the ground; it doesn't matter that property values continue to rise beyond that, since you've already got the housing you need. But so many other things really are choices. I see lots of my colleagues replacing their new cars every 3 years; mine is five years old, having replaced the car I previously owned for 12 (and they were a Hyundai and Subaru, respectively, even if I could afford a Mercedes). Having cable TV with all the movie and sports channels is very much a decision that anyone can pass by. How often and where you eat out makes a big difference in expenses. Clothes, shoes, jewelry, furniture, matching stainless steel appliances with wifi, ... the list goes on and on.
    - oposa 7y ago
      Maybe a couple can survive changes in the housing and job market well enough that it they don’t mind the changes to their quality of life. But it very likely will be noticeable to their kids when other families have stronger finances and better access to housing and job markets. If you can’t save more than the difference to such markets what you get for the money is de facto less. It is sort of inflation by inequality. Then the theory doesn’t really hold and the frugality has just been to try and keep up. I am all for frugality but in many places it hasn’t worked out in the last 10 years because you haven’t had the same access to growth. Unless you already had assets in the first place.
CWuestefeld 7y ago
I'm pretty sure this is true, but there's an extra dimension. When we look at others around us, we see that the Smiths take a vacation in Europe every year; the Joneses have three kids, each in travel sports leagues; Fred Johnson has a new Corvette; the Harrisons just put in a swimming pool. All those people that we take to be our peers are able to do various expensive things, and from that we generalize that we, too should be able to do those things. The problem is that such expenditures are probably OK if you're doing one or maybe two of them. But it's hard to see that all those other people are limiting themselves in that way; it's easy to see an illusion that our peers can do all those things, and so we believe that if we're of the same economic class, we ought to be able to do them all as well.

lonelappde 7y ago

That's "Keeping up with the Joneses". The way out of it is with cognitive training / therapy to have a healthier outlook on your life, and/or learn to hate everyone trying to sell you stuff.

abecedarius 7y ago

I think this model is on the right track, though I'd change "quality of life" to "positional goods and signaling games". Not all of quality of life is from doing better than other people in your reference set, else FIRE would be an unreasonable goal for middle-class workers. It's interesting to think about how to reduce the prevalence/cost of these games.

kgwgk 7y ago

The average is not really that important. As long as your income is not at the lower end of the distribution it’s a just a matter of choice to live as if your income was lower than it is (except in the cases where you would have access to subsidies if your income was actually lower).

oposa 7y ago
I have found this to be distinctly not true. I don't know of many places were living a more modest life is a good choice. It seems like most people who says this have already benefited from cheaper education, real estate, their partner or career. In many countries average savings doesn't keep up with the increase in property values, especially not in attractive job markets. If you don't have wealth, or go into debt, you are falling behind. I really don't see it, maybe you have some example?
- CWuestefeld 7y ago
  I think the kind of things you're talking about are more exceptions, and probably don't matter as much to a given family in the long run. For example, once I've managed to buy a house, that's a stake in the ground; it doesn't matter that property values continue to rise beyond that, since you've already got the housing you need. But so many other things really are choices. I see lots of my colleagues replacing their new cars every 3 years; mine is five years old, having replaced the car I previously owned for 12 (and they were a Hyundai and Subaru, respectively, even if I could afford a Mercedes). Having cable TV with all the movie and sports channels is very much a decision that anyone can pass by. How often and where you eat out makes a big difference in expenses. Clothes, shoes, jewelry, furniture, matching stainless steel appliances with wifi, ... the list goes on and on.
  - oposa 7y ago
    Maybe a couple can survive changes in the housing and job market well enough that it they don’t mind the changes to their quality of life. But it very likely will be noticeable to their kids when other families have stronger finances and better access to housing and job markets. If you can’t save more than the difference to such markets what you get for the money is de facto less. It is sort of inflation by inequality. Then the theory doesn’t really hold and the frugality has just been to try and keep up. I am all for frugality but in many places it hasn’t worked out in the last 10 years because you haven’t had the same access to growth. Unless you already had assets in the first place.

CWuestefeld 7y ago

I'm pretty sure this is true, but there's an extra dimension. When we look at others around us, we see that the Smiths take a vacation in Europe every year; the Joneses have three kids, each in travel sports leagues; Fred Johnson has a new Corvette; the Harrisons just put in a swimming pool. All those people that we take to be our peers are able to do various expensive things, and from that we generalize that we, too should be able to do those things. The problem is that such expenditures are probably OK if you're doing one or maybe two of them. But it's hard to see that all those other people are limiting themselves in that way; it's easy to see an illusion that our peers can do all those things, and so we believe that if we're of the same economic class, we ought to be able to do them all as well.