Humans are hardwired to try to keep up with the Joneses. But because of differences in how we perceive our own wealth compared with that of others, doing so may be costlier than we realize, according to research by Chicago Booth PhD student Rafael Batista, Booth’s Abigail Sussman, and Indiana University’s Jennifer Trueblood.

That’s because when assessing their own wealth, people tend to focus more on debt than they do when estimating others’, the researchers demonstrate in a series of experiments. This difference means that someone trying to keep up with the Joneses might need to take on more and more debt. The thought process helps shape how we plan for the future and how we perceive our own consumption today, they write.

Batista paints the picture of someone who drives through a neighborhood of big fancy houses and thinks, “Wow, wealthy people live here.” But to imagine buying one of those houses, the same person would most likely think first about how big the mortgage would be.

“When you look to other people, you infer they’re wealthy because you see them spending a lot of money on something,” Batista says. “But when you think of yourself, the first thing that comes to mind is how much debt you’d need to purchase the same item.”

In six online experiments—each involving 400 or more participants—the researchers tested how people think about their own and other people’s wealth. In one, participants were shown 20 hypothetical financial profiles, each with a different mix of assets and debt. Some participants were asked to imagine themselves having the proposed financial profiles (presented to them one at a time), while other participants were asked to imagine someone else. For example, they might have been asked to suppose that “Mr. G has $2,500 in assets and $1,300 in debt” or that “you have $2,500 in assets and $1,300 in debt.” They were then asked to predict what the financial situations would look like in a year.

People were generally optimistic about the future, believing that assets would grow and debts would shrink for themselves and others, the researchers find. Participants tended to predict that their own debt would shrink faster than someone else’s, consistent with a focus on one’s own debt relative to others’ debt.

Another experiment tested people’s experience of present-day wealth. Participants again saw 20 profiles, but this time those included the price of a recently-purchased home and the outstanding mortgage balance associated. Depending on whether they were imagining themselves or someone else having each profile, participants were asked either how well off they felt or how well off the other, imagined person felt. The researchers repeated this experiment with another large purchase, a car. In both cases, debt weighed more heavily on participants’ perceptions of themselves than on their perceptions of others. Thus, having a more expensive home or car had a greater influence on people’s evaluations of others’ wealth—but when it came to evaluations of their own wealth, the greater issue was having more debt.

According to the researchers, “the concern that leads people to want to pay their debt off more quickly in the future is also what drives a gap in perceptions of wealth in the present.”

Participants seemed to implicitly recognize this gap in perception. When subjects were asked to consider their own financial profile from another person’s point of view, debt weighed less heavily on how wealthy they thought they’d look. The concern that focuses people’s attention on their own debt, the researchers say, is a tension between the social image they project and their own self-image.

Here’s where the Joneses come back into the picture. The more expensive the house or car participants were told they owned, the wider the gap between their self-image and their social image. No matter how much debt they accrued in buying the house or car, people believed others would see them as wealthy. This gap could potentially lead to a biased understanding of the distribution of wealth. People overestimate the number of wealthier people and underestimate the number of poorer people, “leading them to believe their own position is worse than it actually is,” the researchers write.

Because people tend to care deeply about how they appear, this misconception can lead to unwise spending. Batista says he worries about a pernicious cycle.

“If we’re speculating a little bit, one thing our findings imply is that you can find yourself in a kind of horse race,” he says. Given the lack of information people have about others’ debts, they may look over the fence, see a new car in the neighbor’s driveway, and think the neighbor is better off than they are. They then might spend on home renovations, which might make the neighbor, who suddenly feels worse off, buy something else to catch up. And so on.

More from Chicago Booth Review

More from Chicago Booth

Your Privacy
We want to demonstrate our commitment to your privacy. Please review Chicago Booth's privacy notice, which provides information explaining how and why we collect particular information when you visit our website.