A vast array of analysis suggests that Americans are making poor financial decisions that have the potential to lead to extreme future regret. We are consuming way too much and saving too little. One of the best ways to understand why we are acting this way is societal pressure to conform. On one hand, we have all of the articles telling us that we need to save 10%-20% of our income toward retirement. On the other hand, we have the direct experience of seeing how our peers consume. If our peers drive new cars, we think that we can afford a new car. If our friends take foreign vacations, we think that we can afford to do the same. In the competition between what we are told we should do and what we observe those around us doing, peer pressure wins out.
The famous Asch conformity experiment provides a demonstration of how we allow the opinions of groups to override our own views. The experiment is conducted as follows. A volunteer is given a seat in room with a small number of other people, with the the understanding that all of these people are also volunteers. The group is then shown two images and asked to vote on whether the line on the left is the same length as A, B, or C on the right.
The obviously-correct answer is C. When the other people in the room uniformly voted for A or B, however, the volunteer often voted the same way as the group. The point being that people feel substantial social pressure to conform to the view of the group rather than trusting their own judgment.
In their famous study of wealth in America, The Millionaire Next Door, Thomas Stanley and William Danko found that the ability to accumulate wealth was largely tied to one’s ability to avoid peer pressure to consume. The wealthy, they found, typically lived in fairly modest neighborhoods (as compared to their wealth levels). Stanley and Danko concluded that people who move to expensive neighborhoods often save little because they feel the need to match to the consumption of their neighbors. This helps to explain the amazing statistic that 25% of families earning at least $150,000 a year are living paycheck to paycheck. For a more detailed discussion, see this widely read article in The Atlantic.
It will be very hard to be financially successful without either (1) being unusually resistant to peer pressure to consume, or (2) joining a peer group that makes different choices. There are some really helpful online discussion groups that can provide this type of alternative community. One of the oldest and largest investing discussion forums is bogleheads.org. The ethos and philosophy of this group focuses on thoughtful consumption and money management rather than doing what everyone else does.
It is hard to overestimate the significance of the Asch experiments when examining personal finance. Consumption allows us to signal that we are wealthy and financially successful, as well as keeping pace with our high-consumption peers. In other words, by consuming we gratify our own egos as well as conforming to the norms modern consumer society. The problem, of course, is that many people–even high earners–are spending themselves into the poor house.