Relative Deprivation (Pecking Order Bias)

An Overpaid Hick

Nero had mixed feelings toward his neighbors. He was quite contemptuous of John, who represented about everything he is not and does not want to be—but there was the social pressure that was starting to weigh on him. In addition, he too would like to have sampled such excessive wealth. Intellectual contempt does not control personal envy. That house across the street kept getting bigger, with addition after addition—and Nero’s discomfort kept apace. While Nero had succeeded beyond his wildest dreams, both personally and intellectually, he was starting to consider himself as having missed a chance somewhere. In the pecking order of Wall Street, the arrival of such types as John had caused him to be a significant trader no longer—but while he used to not care about this, John and his house and his cars had started to gnaw away at him. All would have been well if Nero had not had that stupid large house across the street judging him with a superficial standard every morning. Was it the animal pecking order at play, with John’s house size making Nero a beta male? Worse even, John was about five years his junior, and, despite a shorter career, was making at least ten times his income.

When they used to run into each other Nero had a clear feeling that John tried to put him down—with barely detectable but no less potent signs of condescension. Some days John ignored him completely. Had John been a remote character, one Nero could only read about in the papers, the situation would have been different. But there John was in flesh and bones and he was his neighbor. The mistake Nero made was to start talking to him, as the rule of pecking order immediately emerged. Nero tried to soothe his discomfort by recalling the behavior of Swann, the character in Proust’s In Search of Time Lost, a refined art dealer and man of leisure who was at ease with such men as his personal friend the then Prince of Wales, but acted like he had to prove something in the presence of the middle class. It was much easier for Swann to mix with the aristocratic and well-established set of Guermantes than it was with the social-climbing one of the Verdurins, no doubt because he was far more confident in their presence. Likewise Nero can exact some form of respect from prestigious and prominent people. He regularly takes long meditative walks in Paris and Venice with an erudite Nobel Prize–caliber scientist (the kind of person who no longer has to prove anything) who actively seeks his conversation. A very famous billionaire speculator calls him regularly to ask him his opinion on the valuation of some derivative securities. But there he was obsessively trying to gain the respect of some overpaid hick with a cheap New Jersey “Noo-Joyzy” accent. (Had I been in Nero’s shoes I would have paraded some of my scorn to John with the use of body language, but again, Nero is a nice person.)

Clearly, John was not as well educated, well bred, physically fit, or perceived as being as intelligent as Nero—but that was not all; he was not even as street-smart as him! Nero has met true street-smart people in the pits of Chicago who exhibit a rapidity of thinking that he could not detect in John. Nero was convinced that the man was a confident shallow-thinker who had done well because he never made an allowance for his vulnerability. But Nero could not, at times, repress his envy—he wondered whether it was an objective evaluation of John, or if it was his feelings of being slighted that led him to such an assessment of John. Perhaps it was Nero who was not quite the best trader. Maybe if he had pushed himself harder or had sought the right opportunity—instead of “thinking,” writing articles and reading complicated papers. Perhaps he should have been involved in the high-yield business, where he would have shined among those shallow-thinkers like John.

So Nero tried to soothe his jealousy by investigating the rules of pecking order. Psychologists have shown that most people prefer to make $70,000 when others around them are making $60,000 than to make $80,000 when others around them are making $90,000. Economics, schmeconomics, it is all pecking order, he thought. No such analysis could keep him from assessing his condition in a relative rather than an absolute way. With John, Nero felt that, for all his intellectual training, he was just another one of those who would prefer to make less money provided others made even less.

Nero thought that there was at least a hint to support the idea of John being merely lucky—in other words Nero, after all, might not need to move away from his neighbor’s starter palazzo. There was hope that John would meet his undoing. For John seemed unaware of one large hidden risk he was taking, the risk of blowup, a risk he could not see because he had too short an experience of the market (but also because he was not thoughtful enough to study history). How could John, with his coarse mind, otherwise be making so much money? This business of junk bonds depends on some knowledge of the “odds,” a calculation of the probability of the rare (or random) events. What do such fools know about odds? These traders use “quantitative tools” that give them the odds—and Nero disagrees with the methods used. This high-yield market resembles a nap on a railway track. One afternoon, the surprise train would run you over. You make money every month for a long time, then lose a multiple of your cumulative performance in a few hours. He has seen it with option sellers in 1987, 1989, 1992, and 1998. One day they are taken off the exchange floors, accompanied by oversized security men, and nobody ever sees them again. The big house is simply a loan; John might end up as a luxury car salesman somewhere in New Jersey, selling to the newly rich who no doubt would feel comfortable in his presence. Nero cannot blow up. His less oversized abode, with its four thousand books, is his own. No market event can take it away from him. Every one of his losses is limited. His trader’s dignity will never, never be threatened.

John, for his part, thought of Nero as a loser, and a snobbish overeducated loser at that. Nero was involved in a mature business. He believed that he was way over the hill. “These ‘prop’ traders are dying,” he used to say. “They think they are smarter than everybody else, but they are passé.”