You know what’s worse than judging a book by its cover?
Judging a book by its cover… AND THEN making financial decisions based on what you guess that book might tell you.
And yet, we do this all the time. Not with books, but with people.
A smart economist named James Duesenberry called this The Relative Income Hypothesis. According to Mr. Duesenberry, people tend to spend more “because the higher spending of others kindles aspirations they find difficult to meet.”
Can we pause for a second and just think about that?
Not only are we judging that guy for the vehicle he’s driving (#NiceRangeRover, Bro)… we’re also likely to spend more on our own ride just to keep up with him.
My question is… WHY?
Why. Do. We. Do. That?
It probably won’t surprise you to hear that I’ve been thinking about that question for decades. I think the reason we do this—from the judging to the spending—is that we tell ourselves stories, and then we believe them.
Let’s consider the gentleman in the shiny Range Rover, for example. I don’t know about you, but I tend to tell myself the following stories about him.
1- Because he’s in that vehicle, he bought that vehicle (appearances = spending).
2- Because he bought that vehicle, he’s rich (spending = net worth).
3- Because he’s rich, he’s happy (net worth = happiness).
Let’s call that story what it is: a house of cards—layer upon layer of assumptions that have no basis in reality. Of course, I have no idea if that guy in the Range Rover bought it (maybe he’s the mechanic); even if he did buy it, we don’t know his net worth (ever heard the expression “Big Hat, No Cattle?); and even if he’s filthy stinking rich, we all know that doesn’t mean he’s happy (do I even need to say that?).
When we stop and think about it, of course, it sounds ridiculous. And yet, these stories we tell are incredibly insidious. They sneak and slink into our thoughts on a daily basis. They fill our brains every time we size up another person.
The truth, though, is that you just don’t know. You don’t know anything about that guy in the Range Rover.
Now, tell me. Do you really want your spending to be dictated by the story you’re telling yourself about him?
That, my friend, is the worst form of speculation…
P.S. As always, if you want to use this sketch, you can buy it here.