Interview: Sara Solnick
Release Date: 02-04-2009
Classic economic theory is grounded in the idea that people make rational choices. Behavioral economists like Sara Solnick see different forces at work. (Photo: Sally McCay)
"Just ahead of the Joneses" may be the new catchphrase for capturing how Americans want to compare economically with their neighbors, according to new research presented by Sara Solnick, associate professor of economics, at the American Economic Association conference early this year. It's been more than ten years since Solnick first began studying "positional goods," products and services from which satisfaction is derived largely in relation to their perceived exclusivity.
The work is so provocative that a paper she published in 1998 was cited within the last several weeks in both The New York Times and the online magazine Slate. It was based on a survey using a "two-world scenario," one in which you have more than everybody and another in which you and everyone else has more but you have relatively less than others. Responses varied depending on the item in question — and correlating to how visible that item is to others. Among the findings in that early paper, fifty percent of respondents chose to have a smaller income in order to be ahead of their peers.
Solnick and her colleagues have followed that with a new survey, one which looked at two visible "goods," a wine to serve at a dinner with friends and how much to spend on an uncle's funeral, as well as two more hidden expenditures, life insurance and charitable donations. Participants were invited to state an amount to spend and then rate their satisfaction with that choice. They were then told that others in their community spent either twice as much or half as much as they had. With that information they were asked to reconsider their satisfaction level, given a chance to adjust their spending, and then rate their final feeling of satisfaction.
With the results in, UVM Today sat down with Solnick to discuss her take on what it all means.
UVM Today: First, can you offer some background on your original paper?
SARA SOLNICK: In this two-world scenario we used, according to strictly economic thinking, rationally you should pick the world where everybody has more. If you care about yourself and you care about other people you would want that one. And really, the main reason why you would choose the other one is if you would want to be ahead of other people. So, actually, you would give up something just to be in that position of superiority. We found that it varied for the things that we asked about. For some things, people really cared about being ahead, like attractiveness. For other things, people were extremely non-positional — particularly for the "bads," like being yelled at by your supervisor. People wanted to be yelled at the least times they could even if they were being yelled at more than other people.
What insights did you take from this new survey?
We wanted to continue to look at this idea of position comparisons but from a different angle. One thing we were able to do with this survey that we couldn't do with the original was to let people choose exactly where they wanted to be on the spectrum. So this was more open-ended. They chose their initial amount and then they could adjust it — or not; we could see where they put themselves. If you say I want to spend $100 and I tell you well other people are only spending half do you go down to $50 so you match them? Or do you go down to $55 so you're a little bit ahead? Do you stay at a $100 so you're way out in front or maybe go to $45? So we could see exactly where people wanted to be.
To me that was important because a lot of times in interpreting our early work it's assumed that people want to be ahead but that was still unclear because we only gave two choices. So we found a bunch of things here. Let's talk about spending first. For all the goods, the spending worked the way we expected — when people were told that other people were spending half, they decreased their spending. And when people were told other people spent twice as much, they raised spending.
For satisfaction, after people were told that their spending was either way ahead or way behind, everybody's satisfaction went down. People don't like to be out of step, even if they're spending more. Many did change their choices and then satisfaction went up. The effect was more pronounced in both spending and satisfaction for the visible goods; for the less visible goods it wasn't quite as powerful. We looked at subgroups like men and women and family income, and it was happening for everyone.
You did your undergraduate work in psychology at Harvard, and you bring more than a little of that to your work. What does that bring to bear on economics?
In economics and psychology we share a lot of the same questions in terms of why people do the things they do. I like economics because there's more of a powerful, bedrock theory to explain everything; it's a powerful idea that people are rational, and they are weighing costs and benefits and acting in their self-interest. But it has limitations. Coming from psychology I could see that it didn't always work. Behavioral economists are saying, but people don't always do it like that. We like the theory, but where it falls short we want to find a pattern of where it's failing, then it will have an even broader reach.
Were there results here that you found counterintuitive?
I don't think I expected satisfaction to go down when people were told they were spending more than other people. And it was interesting to discover that statistically significant patterns of comparison showed up even with this hypothetical approach. But the pattern was there. I think it must be a real effect. The experiment induced a 20 percent change in spending for three goods, and a much smaller change for the charitable donation. There, people understand that we all give what we can.
A recent New York Times editorial cited your early paper to argue that Americans aren't more upset about the current economic crisis because it's affecting everyone. What are your thoughts on that?
In this financial crisis there are some people who are affected more, on both ends of the spectrum — wealthy people because they had the investments that have been severely diminished and people on the other end who are losing their jobs. This sounds callous but for people who are still employed and generally OK, we may be getting that world that we wanted where we are ahead of other people, where other people are worse off so we are now better off than we were in a relative way.
But if you think about the groups that were affected, like the wealthy, if one person were to lose their money that would be devastating to them because they would suddenly be below their peers; they wouldn't be able to maintain their lifestyle. But this didn't happen. Everybody came down. If you lost your job that would be horrible but if many people from your factory or community are laid off, we're all in this together. It's not so much a reflection on you personally; you're not losing your standing because the entire frame of reference has changed. So from that angle, for the people who were very much affected, the fact that people were affected alongside them makes a huge difference.
It's human nature for people to compete. Would you prefer to add a more sustainable or ethical element to it?
I would. There's definitely a position in economics, consumer sovereignty, that says people are just going to get what they want and that should never be criticized. But I guess I'm willing to at least say, if something is so positional — if all that counts is where you stand in relation to others — that's not a very good use of resources. It's been called the positional arms race.
One example is cosmetic surgery. You're pouring money into this, but some people are always going to be better looking than others, and all that you're doing is raising the bar. Before Botox everyone had wrinkles. Now you have a choice and the standard for how you're supposed to look keeps going higher and higher, but actually, you can't really make yourself better looking. You can only keep yourself from falling farther behind.
It's better for society if people were to compete for education than on how big a yard they have. One of them is more constructive, more productive. It's an investment. It's going to yield economic growth.
Do you see a plausible way to change behavior?
No. I think people for millennia have been saying don't compare yourself to others, try to focus on what you have, count your blessings, but no, I don't think we're going to find some great policy approach to that. But I think people would be happier if they could let go of some of those behaviors. And that's what we saw in our survey. When people found out they were either way ahead or behind, their satisfaction went down. They were OK with what they were doing until we told them they were off. So I think it is better to just tend your own garden. But it's hard to do.