You may have noticed that I have a strong interest in politics. Because of this I listen to a lot of political and policy-related podcasts.
One of those podcasts recently covered a topic that I found quite relevant to the personal finance and financial independence space.
I really enjoy listening to The Weeds. The Weeds is a podcast hosted by Vox writers that gets in depth on policy issues. On a recent episode co-host Sarah Kliff highlighted an economic paperStatus Goods: Experimental Evidence from Platinum Credit Cards that has interesting personal finance implications.
When Your Neighbors Make You Poor
We’ve previously looked into the idea of conspicuous consumption. This is the idea that you are making purchases at least in part to boost your social status.
The previous study that we looked at involved the impacts of one of your neighbors winning the lottery. In those situations we find that following the win, neighbors spend more on visible purchases. They buy more expensive cars, spend more on renovations to their houses, and spend more money maintaining their lawns.
At the same time, they don’t make more money, save more money, or cut their spending elsewhere. This means that in trying to keep up with the Joneses with regards to social status, they increase their rates of bankruptcy and risk their financial stability.
When Platinum Cards Make You Poor
Here, we have another example of people gearing their spending towards social status.
In this experiment, customers were told that they were randomly selected to receive a credit card offer. One group was offered a Platinum card. The other group was offered all of the services and benefits of a platinum card, but included as an upgrade to the terms of their current card.
The idea of the study is simple. Because the benefits are exactly the same, then the demand for both cards should be exactly the same if people are acting economically rational. If, instead, people are looking for the social status that comes with having a Platinum card, then the demand for the Platinum would be higher.
As it turns out, we are a status-seeking people. Demand for the Platinum card was 50% higher, despite providing the exact same benefits.
Showing Off Your Status
The idea that this is because of the status attached with a Platinum card is also shown in the purchase history of the customers.
The study looked at the purchases that customers made on their old cards and on their new cards. The Platinum card users showed no difference between their old spending and their new spending when it came to private uses such as online purchases. However, they used the new Platinum card more often than they used to in restaurants, bars, and clubs.
Now that they had their status symbol, the new Platinum card owners had to find ways to show it off to their friends.
The Hunt for More Status
The point is even further driven home by a follow-up experiment.
The experimenters later offered previous Platinum card owners the option of upgrading their cards to new Diamond cards. The Diamond cards were more expensive, but provided “no additional material benefits.” Essentially, people were asked if they would pay more money for a cooler looking credit card.
Some customers were offered the deal outright. Others were told that the income criteria for the Platinum card had been reduced, so the Platinum card was less exclusive than it used to be.
The people that heard about the exclusivity were almost twice as likely pay extra for the Diamond card.
We are a people and a society that wastes a lot of money just to make other people think we have money. I can’t believe that this is entirely conscious, either. There’s no way that all of these people made their decision by saying, “Yeah it’ll cost more, but I’ll look richer when I’m out with friends!”
This means that we need to watch out for this type of conspicuous consumption. It sneaks up on us and saps us of our cash. If we ever hope to be truly wealthy, then we need to guard against spending extra based on concerns about what other people will think of us.