Conspicuous consumption
Niro Sivanathan and Nathan Pettit look at the reasons why low-income individuals tend to spend proportionally more on luxury goods than higher-income individuals.
Examinations of consumer behaviour have shown that low-income individuals spend a proportionally larger percentage of their money on the consumption of conspicuous goods than higher-income individuals. This behaviour, which seems to go against common sense, turns out to stem from the fact that luxury goods are not only status symbols, but they also provide lower-income consumers of such goods with psychological armour.
In a new study published in the Journal of Experimental Social Psychology (May, 2010), Niro Sivanathan, Assistant Professor of Organisational Behaviour at London Business School, and Nathan Pettit, of Cornell University’s Johnson School of Management, draw on psychological theory and research to show that when people feel that their egos are threatened, they are more inclined to buy high-status goods. If, however, they are presented with other means of alleviating their psychological pain, they are less likely to seek these kinds of products.
Sivanathan and Pettit’s article, “Protecting the self through consumption: Status goods as affirmational commodities” bolsters the growing body of literature on compensatory consumption. It proposes a psychological lens for the examination of conspicuous consumption, which has important implications for policy decisions aimed at battling consumer debt.
In discussing the findings of this study, the latest of his explorations of such issues, Sivanathan explains that “the economic explanation — that people purchase conspicuous goods because they want to signal positive things about themselves to others — felt incomplete”. He goes on to say that he and his co-author “wanted to delve into what causes people to act out their urge to purchase conspicuous goods, and more importantly what causes that urge in the first place. Our research shows that part of the impetus behind these consumption decisions is the desire to repair self-threat.”
Self-consumption
The findings in this article are the result of four studies conducted by the authors, three involving panels of university students (a total for the three studies of slightly more than 250 students) and one involving a representative panel of 95 individuals drawn from the general US consumer population, who were provided by a marketing research firm.
The first of the studies examined whether or not individuals facing self-threat (that is, threats to their social selves or threats to their social esteem, status or acceptance) display a greater desire for high-status goods. When the 150 participants in that survey were given negative feedback about something they cared about — information that threatened their self-worth, the value they placed on high-status goods increased. Indeed, the survey showed that, when facing such a threat, individuals are willing to pay more for high-status goods, such as cars and watches, than when they are given positive or no feedback. This first study also showed that receiving negative feedback does not influence an individual’s desire to purchase non-status, run-of-the-mill goods. This suggests there is a unique relationship between feeling threatened and the desire to purchase high-status goods. The mere act of purchasing such a good — even when it is not visible to others — seems to provide a sense of comfort.
The second study, which was aimed at gaining a better understanding of the underlying psychological mechanism causing threatened individuals to consume status goods, involved providing the 65 respondents with an opportunity to affirm their self-worth after receiving negative feedback but before placing a value on a given item. Indeed, when the authors presented participants with the opportunity to reflect on values that are important to them (such as family relationships, health and well-being) before presenting them with a luxury good, their need to acquire the luxury good was diminished.
Self, beware
The third study explored the paradox that those earning the least spend the greatest fraction of their income on conspicuous consumption, that is, on goods that signal wealth. To examine this, Sivanathan and Pettit looked at the relationship between annual income, self-esteem and status consumption of a group of US consumers from 29 states. The 95 participants all completed a questionnaire that measured self-esteem and one’s sense of personal power and then were asked to read about a new car described as high status. After that, they were asked to decide what they would be willing to pay for the car. (To ensure that the different values were not a result of differences in knowledge about the luxury-car market, participants were also asked about their knowledge of that market.)
The analysis of the findings of this third study involved dividing the participants into two income groups, those with household incomes above the 2007 median US household income of $50,233, and those with incomes below the median. The results showed that, among other things, annual household income was significantly related to self esteem; this verified the belief that bruised self-esteem plays a role in the desire of low-income individuals to acquire status goods.
In the fourth study, the authors examined whether or not this seemingly irrational consumption decision provides a buffer against self-threats. Their examination of a panel of 54 university students found that it did, a finding that is significant in the context of ongoing national efforts to reduce household debt and that helps explain why economic incentives directed at motivating debt-ridden households to increase their savings have had little success.
In discussing their findings, however, the authors are careful to issue a caveat, warning that there is more to this problem than consumer behaviour alone. “Certainly, the sole cause of consumer debt is not overspending on high-status goods, but that’s part of it,” Pettit says. “What facilitates overspending on conspicuous goods is both the psychology of the consumer and lenders who leniently extend credit to those most likely to spend beyond their means. It is important to consider revising lending policies that exacerbate the problem for the very people who are prone to engage in such behaviour.”