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when-spending-hurts

When Spending Hurts

July 22, 2012 • Emerging Ideas, Finance & Economics, STRATEGY & MANAGEMENT

By Nailya Ordabayeva and Pierre Chandon

Thorstein Veblen coined the term conspicuous consumption in 1899 to describe spending with the intention of gaining social status.1 Back then, large estates, vintage silverware, and expensive clothes were the typical symbols of status and they were only available to the privileged few. With rising income and the emergence of a large consumer class, conspicuous consumption became a common phenomenon observed in all tiers of society. Today poor households spend a greater proportion of their budget on conspicuous consumption than richer households2,3 and this conspicuous consumption often comes at the expense of spending on healthcare and education4,5 and at the expense of saving, leading to increased household debt and bankruptcy.6,7 For example, in the years leading up to the recession, the saving rate in the US was only 1% in the lowest income quintile as opposed to 24% in the highest quintile.8 Still, we do not fully understand why people engage in conspicuous consumption and what could be done to encourage consumers to think more about their long-term needs rather than zero-sum status games. For example, an important question for social scientists and policy makers is whether increasing social equality would necessarily reduce status competition, and when it may actually backfire and encourage conspicuous consumption.

Today poor households spend a greater proportion of their budget on conspicuous consumption than richer ones do. This often comes at the expense of spending on healthcare, education or savings, leading to increased household debt and bankruptcy.

Why Do People Choose Conspicuous Consumption?

Designer bags, large homes, and expensive cars signal consumers’ status and worth in the social hierarchy. One purpose that these signals serve is that they help consumers associate with desirable groups in their social environment.9,10 When the gap with aspiration groups widens, consumers grow unhappy with what they have and envious of what others have. Many experts believe that this “associative” goal played a pivotal role in the recent boom in conspicuous consumption.4,10 The argument is that, as income inequality grew and the gap between the rich and the poor widened, many consumers struggled to keep up with the Joneses’ increasingly lavish lifestyles for fear of falling behind. As a result, it is widely believed that boosting equality, for example through taxes on consumption or luxury, should discourage conspicuous consumption and boost savings among low-status consumers.

In our own research,11 we showed that this view of conspicuous consumption is incomplete. We found that people do not just want to have what the others have due to the “associative goal;” they also want to get ahead of the others in the social ladder, what we call a “dissociative goal.”12 When dissociative goals are at play, increasing equality can have the opposite effect and actually boost conspicuous consumption among relatively poor consumers. This happens because, as equality increases and more people become clustered in middle tiers, conspicuous spending allows low-status consumers to get ahead of more people and improve their social rank in an efficient way. In the race for status, when what matters is your rank, the benefits of conspicuous spending are higher when your rivals are close to you than when they are far ahead and you would not be able to outrun them. In fact, the benefits of conspicuous consumption are the highest when everybody is the same and spending a minimal amount on status symbols gets you ahead of everyone else.



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One Response to When Spending Hurts

  1. […] Through advertising consumers seem to buy expensive and luxurious products just to show their wealth instead of what their real necessities are. This act is called Conspicuous Consumption. People tend to buy products just depending upon high perception of brand image rather than having an item that satisfies the needs of the consumer. “Thorstein Veblen coined the term conspicuous consumption in 1899 to describe spending with the intention of gaining social status” http://www.europeanbusinessreview.com/?p=2578 […]

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