Kevin Drum describes a question he threw out to his readers:
So how to get at the difference? Well, I figured one possible way is this: if you really were a fairly ordinary upper middle class wage earner making $100K per year, and you had a 50-50 chance of either joining the ranks of the elite or falling down to the bottom of the working class [making $30,000 per year, with no chance of improvement or aid from others], which seems further away to you? The answer from comments was loud and clear: the bottom of the working class. I didn’t count, but I’d say only about 10% of commenters were willing to take the coin flip. The other 90% would stick with their $100K lifestyle.
I actually think Drum is pointing to something profoundly important here, namely that even though a dollar is a dollar the marginal utility associated with an additional dollar of consumption declines pretty sharply.
But I think this is the wrong way to approach the question.
I think what’s going on here is that most people are terrified of being poor, especially in light of the social stigma attached to being lower income. Let’s leave aside the obvious point, that for most U.S. households, $100,000 would be an improvement. Most people are making the calculation that $100,000 annually would be enough, if not fantastic, whereas $30,000 just isn’t enough. It’s not worth the risk.
This isn’t a case of decreasing marginal utility, but bet hedging against an undesirable outcome.
The other point I would raise is ego. Some people, including me, would kick ourselves if we would up on the wrong side of the 50-50 flip. Peace of mind matters too.