Money is like a lot like religion or politics; everyone has a passionate opinion about their own personal finances, but it’s not always easy to talk openly about it without social consequences. For example, the company I work for discourages open discussions about compensation and benefits. This makes sense from a corporate point of view because of the loss aversion theory. Psychologists and behavioral economists have found that we tend to feel loss about twice as intensely as we experience gain.
We can imagine how this will play out if two employees were to find out that one of them was making more than the other. The worker making less would feel twice as bad about his job as the other worker would feel good. So this would lower the overall morale in the workplace and create negative sentiment towards management. 🙁 Furthermore, some people have a cognitive bias known as the Dunning-Kruger effect where they think they’re more competent than they really are, which could lead to misunderstandings.
This is why income, net worth, and other topics related to personal finance are often seen as taboo. We are told to not compare ourselves with others. But pretending to live in a bubble can alienate us from the rest of the world and become self destructive over time. In reality it can be very advantageous to compare our income, investments, and expenses to everyone else around us. Here are some reasons why comparing personal finances is useful.
- You can get the best deals. You compare employee benefits when choosing whom to work for. You compare prices when shopping. You compare company profits when choosing which stocks to buy. So by knowing what your co-workers are earning you’ll get a better grasp of what your labor is worth. By knowing how much your friends spend on cars you’ll have a better idea of where to find the best car deals for yourself.
- You can see the big picture. By comparing your finances with others, you will be able to determine for sure if things are really expensive, or you’re just poor. 😛
- You can improve your own finances. By comparing your financial progress to others you will be able to learn from different people over time. You will know who’s really good at budgeting, and who is the most successful at investing. You can then apply newly learned practices to your own life.