Tuesday, October 02, 2012

More Evidence that Envy Trumps Greed

Two Israeli economists, Haim Levy and Guy Kaplanski, have a new paper, Investment Choices with Envy and Altruism. The go over what kind of utility functions can rationalize the following preferences.
They asked people about the following scenarios:

 1.The value of the subject’s investment in stocks increases during the year from $25,000 to $27,500, and the stock index also increased at the same rate.
2. The subject’s investment and the stock index increase exactly as in Scenario 1, while the portfolio of the peer group appreciates by 50%, from $25,000 to $37,500.
3. The subject portfolio as well as the stock index decrease during the year from $25,000 to $22,500.
4. The subject investment and the stock index decrease exactly as in Scenario 3, while the portfolio of the peer group depreciates by 50%, from $25,000 to $12,500.

 Needless to say, they find that "envy dominates the results as the utility generally decreases when the peer group earns more and it increases when the peer group loses more than the subject." It's relative wealth that matters more than absolute wealth.  This is consistent with the theoretical thesis of my book, The Missing Risk Premium (now with 5 reviews, and the 'Look Inside' feature is now enabled!).


JLonsdale said...

I'm generally sympathetic to your greed vs envy perspective, but this example is complicated by other factors.

If you gave me these 4 scenarios I would think that the 4th scenario gives me the greatest opportunity to make money. That is because it implies large multiple contractions (or economic volatility) that I've navigated successfully leaving me in a strong position and the opportunity to buy a lot of stocks very cheaply.

Scenario 2 is the worst because it implies that I have probably missed a large multiple expansion and therefore stocks are more expensive and it could be harder for me to make money going forward.

Anonymous said...

This also explains the attraction of the Obama wealth redistribution plan.

If people would rather just be better off than their neighbors as opposed to being better off collectively, then I guess leveling the playing field and being doomed to 1% GDP growth and 8% unemployment makes sense, rather than everyone being in a 4-5% GDP growth environment and gainfully employed.

Anonymous said...

IMHO there is no such thing as absolute wealth. Wealth is always relative.

Mercury said...

Beyond a certain level of healthy subsistence and comfort I can see how envy and relative status anxiety are better competitive mechanisms for evolution than greed.

What drove us to evolve our brains beyond those of apes? Maybe it was behavioral dispositions instigated by envy. What is human socializing ultimately besides (more civilized) envy-driven competitive behavior for status and mates? Envy seems more social than greed (the gossip vs. the miser) therefore envy is an integral part of playing the game of (human) life. Human society doesn’t particularly like it when you don’t want to play the game, even if you don’t directly harm anybody. I wonder if people inclined toward anti-social behavior (not necessarily the violent or destructive kind) are less envious than the general population?

In any case envy wasn’t born yesterday and it sure seems like another one of those legacies of evolution and human nature that are incompatible with modern, everyone’s-a-winner theories (despite the actual practices of those who hold them) about how society should be structured. Something will have to give there.

Tel said...

The stock index is (at least to first approximation) an indicator of inflation, and these days everyone understands that fiat dollars are not in themselves real wealth -- they only represent purchasing power of what you could buy with those dollars.

None of these scenarios represent a genuine "everyone wins" situation, merely juggling nominal figures which is intrinsically zero-sum. In order for everyone to win, some new things have to be created (not just more money-printing).

zby said...

Maybe the utility function was more 'I am smart' rather then 'I earn much'?