The Science of Veblen Goods

 

 

 

 

 

 

 

 

 

 

 

 

Nothing exposes human folly quite like our willingness to pay more for something simply because it costs more. 

 

These "Veblen goods", named after US economist Thorstein Veblen who first mapped this peculiar behavior, reveal how deeply status-seeking is wired into our psyche. People aren't just willing to pay premium prices for luxury cars (think Rolls-Royce) and designer handbags (think Hermès Birkin) – they actively desire these items more when prices surge.

 

Brands such as Aston Martin, Bugatti, Cartier and Dior are perceived to be worth more, simply because they cost more. They are not actually any better than their counterpart goods in their category. Their price alone makes them desirable. The most obvious paradox concerns function. Luxury goods are clearly not purchased to satisfy so-called primary needs. Their function is psychological – they promote a sense of being financially powerful and they serve as markers of a real or projected status in society. 

 

This mass delusion comes at a steep societal cost. Researcher B Curtis Eaton describes Veblen goods as "deadweight loss" – burning money on the altar of status competition. [Refer to his and Jesse A Matheson's treatise "Resource allocation, affluence and deadweight loss when relative consumption matters" published in Journal of Economic Behavior & Organization, Volume 91, July 2013, pages 159-178].

 

The science behind this self-deception is almost comical. A 2007 study by K Fliessbach, et al, "Social comparison affects reward-related brain activity in the human ventral striatum" published in Science found that when people compare their rewards to others, it directly affects activity in the brain's reward centers. 

 

The researchers conducted fMRI scans of pairs of subjects performing tasks for monetary rewards, and found that the ventral striatum – a key reward processing region – responded to relative payment differences, not just absolute rewards.

 

As already stated, the higher prices of Veblen goods make them desirable as a status symbol. Take the Rolex Daytona watch (right), which routinely sells above its already stratospheric list price. Buyers aren't purchasing a timepiece – they're buying membership in an imaginary club of supposed superiority. 

 

As Veblen himself wrote: "Conspicuous consumption of valuable goods is a means of reputability to the gentleman of leisure".