With the Mega Millions jackpot at an estimated record high of $868 million ahead of Friday’s drawing, many are dreaming of what they would do with life-changing money.
Neighbors of lottery winners may want to mentally prepare themselves, too. They’re more likely to go bankrupt, a 2016 study by the Federal Reserve Bank of Philadelphia found. Researchers theorized that neighbors of lottery winners were unconsciously trying to match their spending and going broke in the process.
But there are better ways to compare yourself to others. It all depends on who you choose to compare yourself to, and which direction you look when comparing yourself to others.
Those are the findings of a 2018 study by behavioral economist Sarah Newcomb at the Chicago-based investment research company Morningstar.
“Our results lead us to conclude that harnessing the power of social comparisons might be able to meaningfully improve everyone’s financial well-being, which could help us make better financial decisions,” Newcomb wrote.
She surveyed 699 people across a range of income levels to see how they felt after comparing themselves to others. The survey wasn’t nationally representative and didn’t prove a causal link, but Newcomb found strong evidence that people feel better about their own financial health when they do it in certain ways.
Here are the take-aways:
Don’t fight the urge to compare yourself to others — do it better
Humans have a natural urge to see where they rank in the pecking order, and ignoring it is nearly impossible. It’s worth learning how to do it the right way, because people’s feelings about their relative status affect their view of their financial health more so than their income level, age, gender or occupation, Newcomb found.
In fact, people’s happiness tops out when they earn about $95,000 a year, psychologists at Purdue University and University of Virginia found, and even people with six-figure incomes worry about money, according to a 2017 PricewaterhouseCoopers survey. So if want to feel better about your finances, it makes sense to explore other ways of doing so. (One note: The more often you compare yourself to others, the worse you feel about your own financial life, Newcomb found, so try not to do it too often.)
Look down instead of up, but be careful about over-analyzing
People have a tendency to look up and measure themselves against others who seem to have more money and resources than they do. This holds true across all income groups, even for people on the top rung of the income ladder, Newcomb said.
It’s easy to assume that looking up is good for us because it’s a way of challenging ourselves to do better and be aspirational. The problem: It makes us feel worse about our own financial well-being. “It backfires,” Newcomb said. “It’s not working. We may actively be participating in lowering our own financial well-being.”
The easy solution: Look down and compare yourself to people who don’t have as much as you do — it can even be yourself at an earlier time in your own life, if you don’t like the idea of looking down your nose at people. It’s a cliché, but it works, because it’s a way to be grateful for what you have, Newcomb said.
That said, choose wisely. Make sure the person is someone who’s enough like you that you can identify with them, but they shouldn’t be too similar to yourself. If they’re too much like you, you could hurt your sense of financial well-being by becoming scared that you’ll end up like them.
Find a financial role model, someone who is within reach
Participants in Newcomb’s survey felt better about their financial health when they compared themselves to role models rather than family, friends, neighbors or colleagues. A role model is someone whose behaviors and qualities you want to emulate — and someone who feels the way you want to feel about money.
“A very wealthy person who works 80 hours a week and is sick from stress may not be a good role model,” Newcomb said. “Someone who has managed to achieve the lifestyle you want while also finding balance is a more likely choice.”
Once you identify this role model, Newcomb advises, ask yourself what behaviors led them to where they are today? How long did it take them, and how long might it take me? And lastly, what is something specific I can do right now to be more like them?
Be mindful on social media when keeping up with the Kardashians
Of course, Facebook FB, +0.40% Instagram and other social media platforms make it easier than ever to “compare and despair” — and all that time scrolling can take a toll on mental health. Newcomb says it’s key to remember what you’re looking at when you see your friends’ photos.
“We have to understand that when we see someone else’s highlight reel, we’ll compare it our own blooper reel,” Newcomb says. “It’s their best most staged moments compared to our private humiliations. What we have to do is catch ourselves and add some conscious thought to unconscious thought.”
The effects of comparing our financial decisions to other people’s decisions is a growing area of study for behavioral economists. Other research by Duke University’s Center for Advanced Hindsight has suggested comparing yourself to others could help control spending. Researchers conducted an experiment last year where members of an Arizona credit union were given the chance to see how their spending on restaurant meals compared to their peers.
Many of the participants had mistakenly assumed their peers were spending more than they did, and, when they found out their peers were actually spending less than they thought, they decided to reel in their own spending.
“Something about social norms is powerful in changing behaviors, but we still have a lot to learn,” said Andrea Dinneen, a senior behavioral researcher with the Center for Advanced Hindsight. “There’s a lot of ways in which it can backfire.”
