Thursday, July 10, 2008

Wealth, Race, and Conspicuous Consumption

(image credit: darkmatter)

Being a cheap-ass bastard, I've never understood conspicuous consumption. But what would you expect from someone who graduated from HBS, then bought a Toyota Corolla Value Edition (no power windows, no power locks, no trunk light, no hubcaps)?

According to the latest research, however, conspicuous consumption is more common among the poor. And despite the common racial stereotype of bling-obsessed African-Americans, it's an affliction that affects all races.

"All else being equal (including one’s own income), an individual spent more of his income on visible goods as his racial group’s income went down. African Americans don’t necessarily have different tastes from whites. They’re just poorer, on average. In places where blacks in general have more money, individual black people feel less pressure to prove their wealth.

The same is true for whites. Controlling for differences in housing costs, an increase of $10,000 in the mean income for white households—about like going from South Carolina to California—leads to a 13 percent decrease in spending on visible goods. “Take a $100,000-a-year person in Alabama and a $100,000 person in Boston,” says Hurst. “The $100,000 person in Alabama does more visible consumption than the $100,000 person in Massachusetts.” That’s why a diamond-crusted Rolex screams “nouveau riche.” It signals that the owner came from a poor group and has something to prove.

So this research has implications beyond race. It ought to apply to any peer group perceived by strangers. It suggests why emerging economies like Russia and China, despite their low average incomes, are such hot luxury markets today—and why 20th-century Texas, a relatively poor state, provided so many eager customers for Neiman Marcus. Rich people in poor places want to show off their wealth. And their less affluent counterparts feel pressure to fake it, at least in public. Nobody wants the stigma of being thought poor."

Ironic, isn't it? The perversity of human nature leads those who can least afford it to waste the most money trying to conceal their true condition.

1 comment:

Anthony Kuhn said...

I thought your article pointed out a hidden segment of the market that might be overlooked by some luxury goods companies. I linked to this post in my blog entry today at the Innovators-Network with hopes that some of my readers will comes to Adventures In Capitalism and check out your complete story. Keep up the strong work!