Peergroups and Happiness

Decide well where to live – and how to choose the rest of your peergroup. (Seen in Munich: An old farmers house, now located almost in the middle of town).

A very important factor for your personal happiness is frequently stressed by happiness economics research, while very often underestimated or outright ignored by many people in practice, is the influence of your peer group.

Or more precisely:

The influence of your peer group’s material and financial level relative to yours.

Let’s look at an example:

You finished your university some years ago, started with an average salary at an average company. At least financially you feel great, because mentally, your peer group is still students and on how little they live. And obviously you haven’t adapted to your new wealth level yet.

So let’s assume your salary increases a bit over the next years, you get married and are looking for a new place to live. You look at your budget which looks quite good by now and you look around in your city for the best possible neighbourhood – where the rich and famous live. You do what many people do, you go for the most shiny neighbourhood that you can just afford with what your income allows.

Very bad idea.

Even if we assume that this specific posh neighbourhood is not per se overpriced, i.e. let’s assume you really get something in return for the higher prices there, maybe it is a bit cleaner, greener and better located that other neighbourhoods (in practice this is by no means so clear), it’s still a bad idea. Let’s see why…:

So you found this appartement or house that you can merely afford in that o-so-famous-neighbourhood. Within this great and rich neighbourhood it is admittedly one of the smaller houses, a bit old maybe and a bit less representative, but it’s quite ok for you, and – hey – all that matters is being here! In this great neighbourhood!

Quite wrong from a happiness perspective.

Because what will happen over time?

Right, every day you will catch pitiful looks when you drive down the road with your rusty old junker (or even bike – OMG !!) and past all this shiny brand-new SUVs in your neighbours driveways. You will see their gardens blossom lavishly, benefiting from their gardener’s care while you struggle all yourself against all this nasty weeds. Your neighbours will throw expensive parties were you might easily feel dislocated. And if you manage to ignore all this, later your children will go to school with all this spoiled rich kids of your quarter. They will want to keep up and ask you for all this stupid fashion brands without whom they are likely to fall back in the cruel competition at school.
If your wife (or husband) stays at home, he or she might start to feel inferior, because she/he is not able to afford the daily dose of expensive shopping, going out and weekend trips to luxury resorts that her/his fellows there do.

And if you gleefully propose a funny and frugal camping weekend or hiking tour with a night on a rustic mountain hut to your neighbours, you are quite likely to find few enthusiastic followers.

Well, we could go on and on, but I think you get the point?!

This is the concept of relative peer group happiness at full work.

It sais that your happiness depends not so much on your level of income or wealth, but more so on your level of income relative to the level of income of your peer group.

Thus with the same income as above, you would probably do better under a happiness perspective, if you move to a more modest neighbourhood, where your spending and luxury level is easily at par with your surrounding, even if you decide to live frugally and not throw out every earned dime instantly for consumption and status symbols.

(Actually you would do even better if you’d move to a really poor neighbourhood or a third world county, where you would instantly be the top guy around. But then, this might not be the type of people you want to team up with respectively the country might have a couple of other disadvantages that would hinder your personal development…)

I know a story from a family in a very posh area close to Munich, who was initially very wealthy but got into financial troubles. Not severe troubles by normal people’s standards, but because of their peer group they felt pressed to go into debt to continue to afford their massive house, big cars, expensive parties, private schools and so on. Until finally it all fell together (and came to light), everything was seized by the banks, telephone and electricity were cut and they had to move to social housing.
Needless to say they were instantly expelled from the society of their so-called rich friends.Sad story, would they have simply sold their house in time (probably worth more than 1 mio EUR / 1,2 mio USD) and learned how to live a little bit frugal only, there would not have been the slightest problem. But peer group pressure obviously didn’t allow for that.

Of course, neighbourhood is only one example of the peer group principle. Same holds true to a smaller extend for your peers in your job or industry, or obviously to a very great extend to the people you choose as your friends. Nothing so frustrating than having only friends that are much richer than you and maybe even unhealthy posh posers on top – a big challenge in a town like Munich, that despite of being a great city, is unfortunately full with loads of this in-crowd people.

To summarize, don’t think you have to join a place or a community only because they are in or hip, or because you think it’s cool to live there among the rich. This obviously holds for every level of wealth, as there is always a neighbourhood even richer than you, no matter how much money you have!

There are many people out there who are unhappy just because they try to belong to the wrong peergroup.
Be modest and go for a surrounding and for friends that are a bit more average or  low-key and in the end you might ending up feeling much happier.



Update 15th August 12:

Found 2 great articles on Wikipedia on the peergroup effect to add some scientific background:

Keeping up with the Jones describes the effect in more detail.

“Conspicious Consumption” describes excessive spending on luxury goods for status purpose.


13 comments on “Peergroups and Happiness

  1. […] too often will make you compare to others (or the market) all the time. Problem is, that comparing to others as well as thinking too much about money are both proven to have a negative effect on happiness. […]

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