18 Jan 2010

Real Estate and the 4th World

During the Cold War, we had the First World (the West), the Second World (the USSR and allies) and the Third World (mostly poor countries). When the Soviet Union and Eastern Block disintegrated in 1989-1991, the standard of living for people in those areas went from "decent" (potable tap water, cheap flights, medical care, etc.) to abysmal. In fact, it went down to "Third World" levels. The trouble was that these people had been used to higher (and rising) levels, not a reverse or collapse.

Such a reduction in living standards is hard to take, a psychological blow.

Perhaps my only agreement with Putin -- the current dictator of Russia -- is his description of the fall of the Soviet Union as the "greatest geopolitical tragedy of the twentieth century." While I see his point, he is clearly speaking from the perspective of an apparatchik, not a citizen -- and certainly not a citizen of a Soviet vassal state.

Anyway, I started calling the world that they lived in (I've traveled in most of these countries) the "Fourth World" because it combined Third World living standards with the knowledge that they had only recently enjoyed a better life.

It is with this idea in mind that I think of how the recently impoverished homeowners must feel. A few years ago, their property was worth much more. Now, with 30-40% drops in home values, they are poorer. Even if you tell them that they are merely back in 2003, they are not happy. They used to be "rich," and now they are "poor."

And people feeling this kind of poverty are going to be depressed for awhile. Although I am happy to see them spending less and saving more, I am also worried that they are going to have a bad attitude and/or follow whatever demagogue promises a return to "the good old days."

Those days were not "good" -- they were a bubble. Better to think of the top price on your house as a mistake, and be happy that you have a house at all. (And people who bought at the top just got ripped off. I feel sorry for you.)

Bottom Line: Our feeling of wealth (once basic needs are met) is relative. Instead of starting with "how rich I was" or "how rich s/he is," start with "how rich am I relative to zero?" You'll feel better :)

1 comment:

  1. Years ago I attended a talk by the financial author Andrew Tobias who remarked, "Happyness is a matter of direction." You are making the same point. Our utility functions are not tied to absolute levels of quality of life, but to relative levels. We generaly compare our current situations to our previous situations or to the situations of others.

    Populists leaders can exploit this behavior quite easily, but it is difficult to find an example of a populist leader who improved the conditions of his/her people.

    Bottom Line: Envy is a poor tool to accomplish positive results.


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