Relative Income Hypothesis
Version 1.0.0 · Updated 2026-07-30
CORE DEFINITION
An individual's consumption is determined not by absolute income but by their relative position in society. Moreover, consumption exhibits a 'ratchet effect': when income increases, consumption easily increases; when income decreases, consumption is hard to decrease (it is easy to go from frugality to extravagance, but hard to go from extravagance to frugality).
SCAFFOLDING EFFECT
Reduce cognitive load
Psychological resistance to consumption downgrading. This explains why the middle class suffers the most during economic downturns: because their consumption habits are locked in by social status (ratchet), unable to flexibly adjust downward with income decline, leading to financial collapse.
Anchor fast decisions
Duesenberry: consumption is determined not only by absolute income but also by relative income (compared to others or to one's own past).
MINIMUM ACTION
In progress 0/1Practice this model in one real situation:
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Source support: Explicit
- en.wikipedia.orghttps://en.wikipedia.org/wiki/Relative_income_hypothesisverified
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