Spending as a positional game

Two jobs. Both are yours if you want them, both have the same hours, the same commute and the same work.

In the first you are paid 50,000 and everyone around you is paid 25,000. In the second you are paid 100,000 and everyone around you is paid 200,000.

The second pays twice as much. A substantial number of people take the first, and they are not confused about which number is larger.

The fixed-supply problem

This is the structural fact that makes positional spending different from ordinary spending, and it is worth stating plainly because it is unusual.

Nearly everything else in an economy can be made more of. Cheaper production means more people get the thing, and that is a genuine improvement — the entire first half of this course is about mechanisms that do exactly that.

Position cannot be manufactured. There are as many places in a ranking as there are people, and there always will be. Any effort spent moving up is matched by somebody else moving down, and any money spent on the effort has gone.

Predict

A neighbourhood's incomes all rise by 30% at once, and everyone spends the same share as before. What happens to the satisfaction people get from their houses?

Choose one answer

It rises by roughly 30% — everyone has more houseIt rises, but by much less than the spending didIt stays exactly the sameIt falls, because expectations rise faster than houses do

Lock in answer

Who you are actually comparing yourself to

The comparison set is not "everyone". It is small, local, and largely chosen for you by circumstance: colleagues, the people at the school gate, whoever you went to university with, whoever appears in your feed most often.

Two consequences follow, and both are useful.

The first is that the set is not stable. Changing job, moving city or changing what you read replaces the set wholesale, and the same income can feel comfortable or embarrassing depending on which set you happen to be standing in. Nothing about the money changed.

The second is that the set has been getting worse. A comparison group used to be bounded by who you could physically meet, and it contained a normal spread of outcomes — some better off, some worse. A feed is not bounded and is not representative. It is a stream selected for being worth showing, which means the comparison group is now the upper tail of everyone.

Not the same thing

Consumption

Money exchanged for goods and experiences that are used up.

Measured in

Amount spent per year, and what it is visibly spent on

For example

A car, a holiday, a kitchen, a watch.

Chase it alone and

It is the part of a financial life that other people can see, so it becomes the thing that gets optimised.

Wealth

Claims and productive assets retained rather than exchanged for goods.

Measured in

Net worth, and the income it can produce without you working

For example

The holiday that was not taken and is now in an account.

Chase it alone and

It is invisible by construction, so it earns no status at all and has to be wanted for something other than recognition.

Which is which? Put each one on a side.

• A car bought with a five-year loan

  ConsumptionWealth

• The difference between what someone earns and what they spend

  ConsumptionWealth

• A larger house in a more expensive area, bought at the limit of what a lender would approve

  ConsumptionWealth

The part that is not the reader's fault

It would be easy to write this lesson as a lecture about vanity. That would be both unkind and wrong.

Caring about relative position is not a weakness people should be talked out of. Standing in a group has always had material consequences — who cooperates with you, who trusts you, who will help when something goes wrong. A mechanism that tracks it is not vanity, it is the same machinery that makes anyone functional in a group of humans.

What has changed is that the signals have been industrialised. An enormous amount of commercial effort goes into attaching status to purchasable objects, because a good sold as position has no natural ceiling on its price, whereas a good sold as function has one. That is a business model, described at length in track 4, and it is aimed at a mechanism you did not install and cannot remove.

Check

What is the one move that actually changes the outcome of a positional game?

Choose one answer

Winning it — earn enough that the comparison is comfortableChoosing which comparison set you stand in, and being deliberate about itNot caring what other people thinkSpending on experiences instead of objects

Check answer

The asymmetry worth remembering

Consumption is visible and wealth is invisible, and everything in this lesson follows from that one sentence.

The person with the expensive car may own the car, may be paying for it over five years, or may be a year from selling it under pressure. From outside, those three are indistinguishable, and the first is not the most common. The person who has quietly accumulated enough to stop working looks exactly like somebody who did not earn much.

So the visible signal is not weakly correlated with wealth. It is sometimes inversely correlated with it, because the money spent on the signal is the same money that was not accumulated. That is not a paradox. It is subtraction.

›Why the effect is strongest just above the bottomOptional

Positional spending is not evenly distributed across incomes. It tends to be heaviest where a small amount of visible expenditure makes the largest difference to how someone is treated — which is not at the top.

Somebody whose position is secure gains little from another signal. Somebody whose position is precarious can gain a great deal, and is therefore facing a genuine incentive rather than a foolish one. It is worth holding on to this before concluding that people who spend on visible things are making an error; for a meaningful number of them, the signal is doing paid work.

Worth remembering

• Positional goods are wanted for the place they buy in a ranking, and the supply of places is fixed however much of the good is produced.
• When a whole group's spending rises together, the positional share of that spending buys nothing collectively.
• The comparison set is small, local and largely chosen by circumstance, which makes it the adjustable part of the mechanism.
• Feeds replace a bounded, representative comparison group with the upper tail of everyone.
• Consumption is visible and wealth is invisible, so the visible signal is a poor guide and is sometimes inversely related to the thing it signals.