Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Treats Spending as a Social Signal
Transcript
- Lucas: Luna, think about the last time you saw someone wearing a really expensive watch — I'm talking a Rolex Submariner or an Audemars Piguet Royal Oak. What went through your mind? Luna: Honestly? I probably thought 'that guy has money' or 'he's into luxury.' But also — why does he want me to know that? Lucas: Exactly. That's the core of today's topic: spending as a social signal. Economists call it conspicuous consumption — a term coined by Thorstein Veblen way back in 1899 in his book 'The Theory of the Leisure Class.' Veblen argued that people buy expensive goods not for their utility, but to signal their status. Luna: So it's basically a signaling game. I buy a $10,000 watch to show I can afford to drop $10,000 on a watch. Lucas: Right. And the fascinating thing is that for these status goods, higher prices can actually increase demand. That's the Veblen effect — the opposite of normal supply and demand. If a watch costs $500, it might not signal much. But if it costs $15,000, it screams 'I belong to an exclusive club.' Luna: So luxury brands actually benefit from raising prices? That seems counterintuitive. Lucas: It is, but it works — up to a point. Consider the French luxury brand Hermès. Their Birkin bag can cost anywhere from $10,000 to over $100,000. And they deliberately keep supply low. You can't just walk into a store and buy one; you have to build a relationship with a sales associate. That scarcity and exclusivity fuel the social signal even more. Luna: So it's not just about the bag — it's about the fact that you managed to get one. Lucas: Precisely. And there's a related concept called the snob effect, where demand decreases as more people buy the product. If everyone has a Birkin, it loses its status value. So luxury brands walk a tightrope — they want enough sales to be profitable, but not so many that the signal gets diluted. Luna: Then there's the flip side: the bandwagon effect, where demand increases because others are buying. That's more like fashion trends or viral products. Lucas: Exactly. And both effects are at play in modern markets. Take the rise of 'stealth wealth' brands like Brunello Cucinelli or Loro Piana. These are extremely expensive — a Brunello cashmere sweater can cost $2,000 — but they have very subtle branding. No logos, no flashy patterns. The signal is only readable by people 'in the know.' Luna: So it's like a secret handshake for the wealthy. I've heard that Brunello Cucinelli calls his customers 'the chic and the rich' — very on the nose. Lucas: It is. And that's a deliberate strategy. The brand cultivates a quiet exclusivity. By not shouting, they actually scream louder to the right audience. This is all about social signaling — and it's not just for luxury goods. Luna: Give me an example outside of fashion. Lucas: Think about cars. A Toyota Corolla gets you from A to B reliably. A BMW 7 Series also gets you from A to B, but at ten times the cost. The extra cost isn't about utility — it's about signaling. Same with houses in certain neighborhoods, or even the school you send your kids to. Veblen's insight was that much of our spending is about relative status, not absolute needs. Luna: And social media has turbocharged this. Now we can broadcast our consumption to hundreds or thousands of followers. An Instagram post of a champagne brunch or a new designer bag is a status signal amplified. Lucas: Absolutely. Researchers have found that people who post more on social media tend to spend more on conspicuous goods, especially in categories that are photographable. It's called 'Instagrammable consumption.' And brands have caught on — they design products specifically to be photogenic and shareable. Luna: So what's the behavioral economics takeaway? If we know this is happening, can we resist it? Lucas: Awareness is the first step. Research suggests that when people reflect on why they're making a purchase — 'am I buying this for its function or its signal?' — they can sometimes shift their spending. But it's hard because these signals are deeply ingrained. We're social animals, and status matters for survival. Luna: There's also a concept called 'positional goods' — things whose value depends on how they compare to others. A degree from a top university, for example, is valuable partly because it's scarce. If everyone had one, it wouldn't be as prestigious. Lucas: Right. And that's where the arms race comes in. As more people buy luxury goods, the bar for signaling rises. A $1,000 watch used to be a status symbol; now it's a $10,000 watch. This is called 'luxury fever' or 'positional arms race.' It can lead to overconsumption and debt. Luna: Let's talk about one specific modern example that illustrates this: the limited edition sneaker market. People lining up for hours to pay $200 for a pair of sneakers that cost $20 to make. That seems purely about signaling. Lucas: Perfect example. The sneaker resale market is worth billions. Brands like Nike and Adidas create artificial scarcity with limited drops. The value isn't in the shoe's function — it's in the exclusivity. And the social signal is amplified by social media: you flex your pair, get likes, and the cycle continues. Luna: And then there's the 'hype' element — FOMO drives demand. That's behavioral economics in action. Lucas: Speaking of behavioral economics — and this ties into something our listeners often ask about — a quick honest thing. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes. We keep the show ad-free and independent, and that small group makes it possible. Luna: Yeah, it's a small tribe, but they're the reason we can dive deep into topics like conspicuous consumption without any sponsor pressure. It matters. Lucas: So back to the sneaker example. The limited edition model works because it exploits the Veblen effect — higher perceived value from scarcity — and the snob effect — only a few people can have them. But there's also a clever marketing twist: 'friends and family' exclusives. Brands give a few pairs to influencers, who then post them, creating desire among followers. Luna: That's like a modern version of Veblen's leisure class: the influencers become the visible consumers, and the rest of us aspire to their level. Lucas: Exactly. And Veblen would have a field day with influencer culture. The whole premise is that you perform your status through consumption, and others watch and emulate. The difference now is scale: a single Instagram post can reach millions. Luna: So how do we, as everyday consumers, avoid falling into the conspicuous consumption trap? Any practical tips from behavioral economics? Lucas: One tool is to reframe your reference group. If you compare yourself to billionaires, you'll always feel poor. But if you compare to your own past or to your community, you might feel more satisfied. Also, try a 'waiting period' before big purchases — 24 hours for anything over $100. It reduces impulse buys driven by social pressure. Luna: And think about what you're really buying. If it's a status signal, ask yourself: who am I trying to impress? And will they actually care? Lucas: That's a great question. Research shows that we overestimate how much others notice our consumption. It's called the 'spotlight effect.' People are too busy with their own lives to pay attention to your watch or handbag. So the signal might be weaker than you think. Luna: So in a way, the whole game is based on a misperception. We spend to signal, but the signal often goes unnoticed or unappreciated. Lucas: Exactly. And that's the beauty of behavioral economics — it reveals the gap between why we think we spend and the real psychological drivers. Conspicuous consumption is one of the oldest and most powerful examples. Luna: So the next time I see a $15,000 watch, I'll think: Veblen, snob effect, and a dash of Instagram. Thanks, Lucas. Lucas: And maybe you'll save a few bucks. That's the hope, anyway. Thanks for being curious, everyone.