Relative vs Absolute Wealth

There’s a stat I often hear in economics, but people rarely see the takeaway. The saying is that even though the annual income threshold to be in the top 1% in the US is around $400,000, for global income it is only $32,000 (Investopedia for US and world). Therefore the US middle class ought to feel like they are doing very well compared to the rest of the world.

While this is partly true, it ignores things like purchasing power and different costs of living in different countries. And people often get bogged down in the details of these objections rather than admiring the giant wealth gap that exists between countries and how well off Americans are who claim they are not.

To demonstrate the point better, I think there are two better comparisons to make. The first is to make the comparison across time and also within countries. The second is to make the comparison in simulated/virtual environments where people all start off on the same footing—video games. People usually care more about relative wealth than absolute. And maybe we should be thinking more about absolute.

Historical Economic Growth

I’ve previously written about human progress over time, and it’s still the case that this is underestimated. People generally think of growth as additive, but in reality it is exponential. Life isn’t just somewhat better than it was 300 years ago. It is orders of magnitude times better:

gdp_per_capita_slide

And yet, people often claim that things are worse than before (e.g., Make America Great Again). We’ve made this exponential curve of progress, and many problems of the past we now don’t ever think about—the diseases that have been conquered, a scientific understanding of the world, advances in healthcare, access to modern technology, democratic society, much lower chance to be murdered, not taking months to communicate with someone on a different continent, looking up information from the sum total of human knowledge from a device in your pocket, and so forth.

We only think about the problems that face us now, never thinking about the problems that have already been solved and the things that didn’t exist before. And when we compare ourselves to people, we take all the above for granted and point out most absurd of differences (like claiming how in a hunter-gatherer society, you obtained some food and then had leisure time, therefore we should go back to being hunters and gatherers.).

Social Comparison

Among the most useful ideas to understand human interactions is that of keeping up with the Joneses. People strive to keep up in material wealth with their neighbors and friends. This is why one common response to the global 1% statistic is “why don’t I feel rich”? Because they are not comparing to the average human; they are comparing to their other global 1% neighbors.

A study by researchers at the University of Warwick and Cardiff University has found that money only makes people happier if it improves their social rank. The researchers found that simply being highly paid wasn’t enough — to be happy, people must perceive themselves as being more highly paid than their friends and work colleagues.

The researchers were seeking to explain why people in rich nations have not become any happier on average over the last 40 years even though economic growth has led to substantial increases in average incomes.

Lead researcher on the paper Chris Boyce from the University of Warwick’s Department of Psychology said: “Our study found that the ranked position of an individual’s income best predicted general life satisfaction, while the actual amount of income and the average income of others appear to have no significant effect. Earning a million pounds a year appears to be not enough to make you happy if you know your friends all earn 2 million a year.” (ScienceDaily)

This effect has become bigger in recent years, as it has been exacerbated by social media. People are now much more likely to see the day-to-day of people more well off than they are—not just the super rich, but the person you thought you were clearly superior to in high school who is now doing much better than you, and being reminded of this constantly on Facebook. And people show off their best on social media, so if everyone compares their average life with what they see on social media, everyone could be unhappy.

One of the most memorable essays from The Occupy Handbook is one precisely on relative vs absolute wealth, specifically on the idea of “last-place aversion”, and I’m not sure it actually makes the reader more or less supportive of the Occupy movement. The authors write:

We also documented last-place aversion outside the laboratory by surveying a sample of Americans about their attitudes toward an increase in the minimum wage. The minimum wage obviously affects low-income workers disproportionately, and thus it is reasonable to expect that most low-wage workers would support an increase. Indeed, we generally do observe this pattern, with one major, and telling, exception: those making just above the minimum wage, $7.25 per hour, are far more likely to oppose an increase than those making $7.25 or below or those making more than $9.00. That is, people making $7.50 per hour would rather forgo a small raise than take the chance that an increase in the minimum wage will cause them to earn the “last-place” wage themselves—and to be tied with workers previously below them. (“Where Is the Demand for Redistribution?” from The Occupy Handbook)

So it’s more important to make more money than other people, rather than to just make more money in absolute terms.

Video Games

Now let’s talk about Diablo 3. This game, as originally released in 2012, was an item-grinding game, where you kill monsters to get powerful items, so that you can kill even stronger monsters to collect even more powerful items, and so forth. The following is basically all anecdote, so be warned (I’m not aware of any literature on this).

This game was done very well, but was highly controversial at launch. Its Metacritic rating was 88% from critics but only 40% from site users (averaged from some good ratings and many 0’s).

diablo3_metacritic

I claim the controversy came from economics. The central core of the game is described above, where random items drop for you to collect, and you collect better and better items as you play more. This was all fine, except Diablo 3 did one thing that other games did not: have a massively available public online exchange for trading items.

Without trading, the game felt very good. To abstract it a bit for the sake of argument, suppose there are 10 difficulty stages in the game, 1-10, 1 being the easiest and 10 being the hardest. Most people breezed through the easier difficulties got to somewhere 4-7 on their own without much trouble. But the game ramped up in difficulty significantly once you got to 8, 9, and 10, and most people started struggling as soon as they got to 8. I claim this was still fun because the point of the game was to play the game, get better items over time so you can defeat 8 and go to 9, and then beat 9 and 10 eventually. However…

The most hardcore gamers, including many famous streamers on Youtube and Twitch, could get to 8, 9, and 10 very quickly (arguably partly from skill in playing video games, and also from just spending lots of time on the game or spending money on items), and one person even did 10 on a “hardcore” mode where any death is permanent and your character doesn’t respawn.

(For people who know the game, 8 refers to Act 1 Inferno, 9 = Act 2 Inferno, 10 = Acts 3&4 Inferno, and the one person who beat Act 4 Inferno before nerfs was Kripparrian.)

There were millions of players at launch, and they weren’t satisfied struggling in difficulty 8 while streamers were doing well in 9 and 10. And from the social aspect of the game, they weren’t satisfied being stuck on 8 while their real-life friends were on 9 and 10.

Remember the item exchange from earlier? Now all the people stuck on 8 could amass in-game currency and buy items obtained by the people on 9 and 10, and thus move themselves to 9 and 10. They basically bypassed the game itself, skipping the gameplay process of fighting monsters to get better items. And when a critical mass of people did this, the keeping up with the Joneses effect really kicked in. Now all of your friends are trying to take down the boss for 9 and 10, but you’re still stuck on 8 and can’t play with them. So you also go out and buy some items to keep up. The difficulty level you played on was your social status. (Why are you stuck on 8? Are you bad at the game?)

The whole game was a microcosm of economics. There were many different “builds” or strategies that characters could use, but the game soon degenerated into 3-4 common hyper-efficient builds that were borderline exploitative. It should have been that most builds seemed ok and a few were really good. But since everyone else was using the best-possible builds, using any other build was basically crippling yourself and your party. Instead of trying out cool, unique builds on level 8, everyone went to the degenerate builds on levels 9 and 10, which is why the game effectively had no variety. It was a case where buying a really good item made you more powerful in absolute terms, but since you then just went to a higher difficulty level, you didn’t become relatively more powerful, and now you have less flexibility of strategies. This made the game less fun despite being your character being objectively more powerful.

In addition, the more people bought items from the exchange, the lower the chance they would ever find a relatively better item naturally. If you have a 50th percentile item to start, you’ll in expectation find an upgrade in the next two items. But if you go to the exchange and buy a 99.9th percentile item off the bat (as most people did), then it will take 1000 items drops in expectation for you to find a better item naturally. (I think I was one of the people who figured this out at the time, and I wrote a popular forum post on the official Diablo 3 forums. Since then, the game has actually done both suggestions, to remove the exchanges and trading in general, and to soft-reset the items every few months, so people aren’t stuck in the situation where they have the 99.999th percentile items and can’t feasibly get better ones.)

Anyway, this experience in 2012 is why I think about the topic a lot. It’s nice for people to move up and improve their standard of living, but the improvement should be on a personal level and not to be keeping up coworkers and Facebook friends.

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