Your wife is testing you. SHe's testing your masculinity and your courage.
if you just back down and watch she is NOT going to be impressed. She may laugh and go off to her affair and have fun, but she loses respect for you... And its VERY HARD to win over a female who has no respect for you... I would argue it can't be done at all.
If you stand up, protect your marriage, tell the creep to BACK OFF, and get in thiker wtih MIL and talk about the importance of making mature decisions and show her a responsible adult she will be a LOT more impressed.
She will be mad you took action, but she will respect you for it.
Let me give you a scenario.
You are at the beach with your wife. You are both loving each other having fun. A guy nearby suddenly says something sleazy to your wife.
You hit him and he hits the sand and you both walk away.
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Your wife is giong to be MAD at you for being violent. Most women don't like seeing that. But at the same time she will RESPECT you for protecting her.
If you did NOTHING and ignored him your wife won't be MAD at you no... But she will be thinking in her mind "Some creep just violated me and my husband just sat there and did nothing... That makes me feel pretty vulnerable... And scared... And unloved..."
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You need to learn to protect your family dude. Your wife won't have an ounce of respect for you if you don't.