Why the people around you shape what you spend

CostMe Research Desk · July 1, 2026

There is a specific kind of financial discomfort that has nothing to do with your actual finances. It shows up after a weekend at a friend's nicer house. After scrolling past vacation photos from people in your college cohort. After a work dinner where everyone ordered without glancing at the prices. You leave those moments and something feels a little off, even though nothing in your life changed.

That feeling is not just mood. It tends to cost money. Research consistently finds that our spending is shaped not only by what we earn, but by what the people around us earn and visibly spend. When the gap between their lifestyle and ours widens, we close it the fastest way available. We buy something.

Why comparison is wired in, not a character flaw

For most of human history, the people around you really were the relevant reference group. If your neighbor had better food, a stronger roof, or a faster horse, those gaps signaled something real about survival and social standing. Paying attention to relative position was adaptive. It made sense.

What does not make sense in the modern world is that the reference group never stops expanding. It used to be the people in your village. Then your city. Now it is whoever curates the most polished version of their life online, plus your actual social circle, plus your colleagues, plus the ads on every surface calibrated to show you a slightly better version of the life you already have. The comparison is always upward. The benchmark is always just out of reach.

One of the most quietly influential ideas in consumer economics is that spending is driven less by absolute income than by income relative to a reference group. When the people nearby are doing better, your sense of what is normal shifts, and your spending shifts with it, often without any conscious decision. The pattern shows up consistently in survey data: neighbors with rising incomes correlate with lower financial satisfaction among people whose own incomes did not rise. What you own matters. What the people nearby own matters almost as much.

This is distinct from FOMO spending, which is about fearing you will miss a specific thing. Social comparison is slower and more ambient. It is the background hum that gradually raises your sense of what a car, a kitchen, a vacation, or a bag should look like. It does not arrive as an urgent buy signal. It arrives as a creeping sense that your current version of something is a little behind.

Why keeping up never quite works

Here is the uncomfortable part: spending designed to close a comparison gap rarely closes it. The comparison recalibrates at the same time you do. If you and your colleagues upgrade to the same tier of car in the same cycle, neither of you ends up ahead. You both spent more. The relative position is unchanged. Economists call these positional goods, things whose value comes partly from the fact that others do not have them yet. The moment the reference group catches up, the advantage disappears and the benchmark resets higher.

Researchers have tested just how real positional preferences are. In one survey, a significant share of respondents said they would rather earn $50,000 when others earned $25,000 than earn $100,000 when others earned $200,000. Absolute income mattered less than relative standing. That is not a quirky data point. It is the engine that makes comparison spending feel so compelling and so unsatisfying at the same time.

There is also a compounding irony at work here. Hedonic adaptation means the boost from a comparison-motivated buy fades within a few weeks, but the comparison itself does not fade. It persists, absorbs the new purchase into the baseline, and waits for the next gap to appear. You end up spending more and feeling roughly the same.

The downstream cost is not just the money spent. It is the money not compounding. A consistent gap between what you earn and what the reference group seems to spend, closed month after month, can quietly defer years of saving. The math does not announce itself. It accumulates in the background the way a slow leak does. This is part of what makes lifestyle creep so hard to notice while it is happening. Each upgrade feels earned and reasonable. The pattern it belongs to only becomes visible when you look back.

The most effective adjustment is not to stop noticing comparison. It is to choose the comparison target more deliberately. Notice when a spending urge followed a social moment: a feed scroll, a dinner, a visit to someone's home. Naming that it was a comparison removes some of its automatic pull. And consider the one comparison that tends to produce actual satisfaction over time: your own past self. What have you built? What did you pay down? What did you say no to last month that you are glad about now? That comparison has no ceiling to reset and no social feed to keep inflating it. It just measures progress, which is the only race that actually goes somewhere.

One related pattern is worth knowing. The spotlight effect tells us the people you are buying things to impress are largely not noticing. The mental load of maintaining a comparison is almost entirely private, which is part of what makes it so persistent and so expensive.

The science behind it

Thorstein Veblen, 1899, “The Theory of the Leisure Class.” The book that named conspicuous consumption: spending to signal social status to others, distinct from spending for use or enjoyment. Veblen argued that a large fraction of consumer behavior in market economies is driven by social comparison rather than utility, and that the display of wealth is itself a product people pay for.

James S. Duesenberry, 1949, “Income, Saving and the Theory of Consumer Behavior.” Introduced the relative income hypothesis: households benchmark their consumption against a reference group, so when that group's income rises, a household's spending rises even if its own income stays flat. Largely displaced by later economic models for decades, but strongly supported by empirical data since and now considered one of the cleaner descriptions of how comparison actually shapes spending.

Erzo F. P. Luttmer, 2005, “Neighbors as Negatives: Relative Earnings and Well-Being,” Quarterly Journal of Economics. Used large-scale survey data to show that higher neighbor income is associated with lower self-reported happiness, controlling for own income. One of the clearest direct measurements of the mechanism: relative position in the local income distribution has an independent, measurable effect on wellbeing.

Sara J. Solnick and David Hemenway, 1998, “Is More Always Better? A Survey on Positional Concerns,” Journal of Economic Behavior and Organization. Surveyed participants on whether they would prefer earning $50,000 when others earned $25,000, or earning $100,000 when others earned $200,000. A substantial share chose the lower absolute income for the higher relative position, demonstrating that positional preferences are real and measurable rather than theoretical.

References

1. Veblen, T. (1899). The Theory of the Leisure Class. New York: Macmillan.
2. Duesenberry, J. S. (1949). Income, Saving and the Theory of Consumer Behavior. Cambridge, MA: Harvard University Press.
3. Luttmer, E. F. P. (2005). Neighbors as negatives: Relative earnings and well-being. The Quarterly Journal of Economics, 120(3), 963-1002. doi.org/10.1093/qje/120.3.963
4. Solnick, S. J., and Hemenway, D. (1998). Is more always better? A survey on positional concerns. Journal of Economic Behavior and Organization, 37(3), 373-383.

Want more on the psychology behind spending? Nobody notices your stuff anyway explores why the audience for status spending is mostly imaginary. Or start tracking what comparison buys are actually costing at costme.io/signup.