Why 'keeping up with the Joneses' never pays off

Omar Al Ubaydli investigates how our consumption affects our social status

Shoppers carry Gucci Ltd. luxury goods shopping bags as they walk along New Bond Street in central London, U.K., on Thursday, Aug. 31, 2017. U.K. consumer confidence staged a slight rebound from its lowest level since just after the Brexit vote. Photographer: Simon Dawson/Bloomberg
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For many things we buy, our consumption decisions partially reflect our efforts to convey a certain social status to others. Luxury cars, exotic brands of water and designer perfumes give us much more than the direct enjoyment of consumption; they send a signal to our peers that we are wealthy and powerful, and that we have good taste.

The 19th century American economist Thorstein Veblen referred to this as “conspicuous consumption,” and scholars have been studying the phenomenon for centuries. A recent study by professors David Clingingsmith and Roman Sheremeta, of Case Western Reserve University in the US, has yielded interesting new insights about humans trying to “keep up with the Joneses”.

Social status is like many goods in that we actively seek it, but it differs from standard goods in two ways.

First, it is positional, meaning that the value of social status depends exclusively upon our standing compared to others. Apples and pencils, on the other hand, are valuable regardless of the volume of apples and pencils possessed by others. As a result, how much social status we seek depends upon how much social status others seek.

Second, social status is non-tradable, meaning we cannot purchase it on the open market in the same way that one purchases milk or laptops. Consequently, we are forced to use indirect means to acquire social status, most commonly buying goods that indicate to others that we are superior in a certain way.

Purchasing expensive jewellery showcases our wealth; reading Shakespeare rather than a tabloid newspaper convinces others of our heightened intellect; and driving a Toyota Prius conveys to others our concern for the environment. All of these attributes contribute to our social status.

Scientifically demonstrating the importance of social status to purchasing decisions is challenging, however, because it is very difficult to isolate the role of a given factor when analysing consumption. For example, when someone chooses to buy a BMW 325 rather than a Nissan Sunny, it could be because they want to acquire social status; but it could be because the BMW 325 is a higher quality car - it is safer, has more features and is more powerful.

Mr Clingingsmith and Mr Sheremeta designed an experiment that helps us expose the contribution of social status concerns to consumption decisions, thereby allowing for some advanced insights about its effects.

In their study, participants took an intelligence test where the results were kept secret. They were then given some money, where the amount given to each individual differed, and asked to choose how much of that money they wished to use to purchase chocolate truffles. The researchers manipulated two aspects of the environment.

First, the amount of money given to each participant was either randomly determined, or it was based on their rank in the results of the intelligence test, with higher performers receiving more money. In each case, participants knew the system being used to determine the amount of money they would receive.

Second, their purchasing decisions were either private, or they were publicised to the participants. Again, in each case, participants were made aware of the rules prior to them making any decision.

In the absence of conspicuous consumption, chocolate truffle consumption should be the same in all settings. However, if conspicuous consumption is important, then participants should consume more when money is dependent on performance in the intelligence test, and when truffle consumption is revealed publically. This is what the researchers found, with truffle consumption being 257 per cent higher in this circumstance.

Moreover, the effect was extremely pronounced for males, equalling 477 per cent. This latter finding echoed the results of recent US research by Daniel Houser and Xiaofei Pan, which found that males exhibited a heightened desire for durable rewards for pro-social behaviour, such as trophies, because such rewards can be shown off.

We are forced to use indirect means to acquire social status, most commonly buying goods that indicate to others that we are superior in a certain way.

In addition to analysing the causes of conspicuous consumption, Mr Clingingsmith and Mr Sheremeta also examined the effects of the conspicuous consumption on the well-being of those participating in the experiment. By gathering detailed information on the participants’ desire to purchase truffles at different price levels, they were able to demonstrate that the opportunity to engage in conspicuous consumption resulted in a net loss to the participants. The benefits of being able to advertise social status failed to offset the cost of the additional truffle purchases, meaning that the competition was destructive. In this specific narrow context, banning conspicuous consumption would have made everyone better off.

This conclusion offers an insight into why certain organisations impose strict uniform codes with zero leeway for individual variation. For example, schools will ban children from wearing jewellery both as a way of nurturing conformity, and to protect children from frivolous “arms races” over who can wear the most attractive and expensive jewellery. It also supports the argument made by George Mason University economist John Nye that when measuring inequality between the rich and poor, consumption inequality exaggerates the actual level of inequality. This is because it fails to account for the fact many of the rich’s expensive purchases are purely for social status, and yield no innate benefits.

Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain