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Bad Influence

Jonathan Clements

KEEP AN EYE ON the neighbors. They could be the reason you’re poor and unhappy.

We all like to think we’re independent thinkers who weigh the evidence and reach our own conclusions—and yet there’s ample evidence that our views are heavily influenced by those around us, whether we’re choosing presidential candidates, bottled water or mayonnaise. This extends to financial matters, sometimes with grim consequences.

Stocking up. Studies have found that those who live near one another tend to invest in a similar fashion. For instance, a 2019 study of households in Finland discovered that nearby investors tend to buy the same stocks at the same time. An earlier study documented a similar pattern in the U.S. It’s also been found that family members influence each other’s investing, with a family member more likely to start investing if a parent or child also started within the past five years.

Is this word-of-mouth investing a bad thing? It depends who’s influencing you. If your neighbor is a fan of total market index funds, he or she may steer you onto the right path—and thereafter the two of you may encourage each other to stay the course.

But if your neighbor is always talking about whatever’s currently hot—bitcoin, Zoom, Tesla, you name it—there’s a risk you’ll find yourself dabbling in the same pricey merchandise, possibly to your regret. What to do? Whenever folks boast to me about their latest speculative bet or proffer some prediction about the market’s direction, I smile noncommittally and say as little as possible, in part because I don’t want their views to poison my portfolio.

Spending wildly. We’ve long known that folks often try to “keep up with the Joneses,” spending money to mimic their neighbors’ lavish lifestyle and to signal their own financial success. This is a dangerous game. We can end up spending heavily on items we don’t really care about, while also failing to save enough for retirement and other important goals.

But it turns out this game is even more dangerous than I imagined. A 2018 study from the Federal Reserve Bank of Philadelphia looked at the influence of Canadian lottery ticket winners on their neighbors. The study’s finding: “[T]he larger the dollar magnitude of a lottery prize of one individual in a very small neighborhood, the more subsequent bankruptcies there will be from other individuals in that neighborhood.”

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It seems that, in an effort to keep up with the local high-spending lottery ticket winner, the neighbors engaged in their own conspicuous consumption. That often required borrowing money, resulting in bankruptcy for some. These bankrupt neighbors also started taking more risk with their investment portfolio, presumably as another way to finance their increased spending.

A similar phenomenon was found among the neighbors of recent Dutch lottery ticket winners. The neighbors were far more likely to purchase a new car in the months afterward. Why a car? It seems it’s all about the enduring signal that the new vehicle sends to others in the neighborhood. As the authors note, “Unlike an expensive party or vacation, a household’s neighbors are continuously reminded of [the family’s] new car.”

To fend off such foolishness, perhaps our best bet is to remember the lesson of The Millionaire Next Door: The wealthiest family in the neighborhood is often the family that you don’t realize is rich—because they aren’t wasting their money on new cars, expensive landscaping and designer clothes.

Eyeing unhappily. Since the early 1970s, inflation-adjusted per-capita disposable income has ballooned 135% in the U.S., and yet our reported level of happiness has barely budged. All this money, it seems, hasn’t bought happiness. Why not? We apparently care less about our absolute standard of living and more about how our income compares to others.

What if we have high income-earners as our neighbors? That makes things even worse. “I find that, controlling for an individual’s own income, higher earnings of neighbors are associated with lower levels of self-reported happiness,” writes economics professor Erzo Luttmer in a 2005 study that’s aptly titled “Neighbors as Negatives.”

This is a reason to avoid situations where you’re reminded that others are far better off. Maybe you shouldn’t seek out wealthy friends. Maybe you shouldn’t visit vacation resorts you can barely afford or buy a house in a town where most of your neighbors will be richer. In fact, I’m a fan of the opposite strategy—living where you can have the quiet confidence of the millionaire next door.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Never AssumeFuture Shock and Scary Stuff.

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Langston Holland
Langston Holland
9 months ago

The behavior of neighbors of lottery winners is amazing! My first thought would be: oh my gosh – I hope it doesn’t ruin him! Kudos to the guys with the “humble homes” in their neighborhoods – let the spendy neighbors increase your property value. 🙂

parkslope
parkslope
9 months ago

Good advice. I would add that human behaviors are almost always distributed on a bell curve. Thus, while research indicates that relative income is important to the average person, some people are obsessed with keeping up with the Joneses/Kardashians while others could care less.
Our youngest son and his wife fall into the latter category and recently purchased an apartment in Bronxville where most of their neighbors have higher incomes. They love being in an affluent area with great public schools and other services. Our oldest son and his wife are more materialistic but also prioritize living in a good school district over owning a nicer home.

bart37064
bart37064
9 months ago

I rarely discuss finances with anyone beyond my wife and financial advisor. I have always considered by finances to be very intimate. My wife is co-chair of my Board of Directors. My financial advisor fulfills his role.
Talking to my friend Ed, who has already been bankrupt and now thinks using a Heloc is the fancy way to pay off his house, seems a waste of financial advice. Except Ed reminds me that people are often ill-advised. Ed reminds me of what not to do.
I mostly ready Humble Dollar, the WSJ, and other sites to garner info so as to make my own decisions. I make calculated moves, avoid fads, and keep quiet. After all, silence is golden.

Peter Blanchette
Peter Blanchette
9 months ago

Your Dutch Lottery study concluded the following …….. “Still, we find convincing evidence that households’ consumption of visible, durable goods (and only such goods) is affected by genuinely exogenous shocks to their neighbors’ incomes.” The effect you are talking about is only in regards to durable goods spending among subjects. This study is not showing some overall deleterious impact on consumer’s spending patterns on other more regular purchases.

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