When considering why someone might spend €30,000 on a purse, it’s important to understand the concept of Veblen goods. These are items whose value depends on being perceived as expensive. Some products, like the Hermès Kelly bag, are so exclusive that they can be resold for more than the purchase price because the brand will only sell them to established, reliable customers. The resale market price on eBay can even be higher than in the store.
A large part of purchasing luxury items is not just about signaling to others, but also signaling to ourselves. Rory Sutherland points to the hidden truth in advertising slogans, like L’Oréal’s famous tagline.
The l’ Oreal end line, because I’m worth it. Some part of that is the person advertising to themself.
This self-signaling provides an ego boost or a sense of reassurance. While a flashy sports car might be about visibly showing you have resources to spare, it is often more about reinforcing one’s own identity. Handbags and watches became particularly powerful status symbols because, unlike high-end clothing that can only be worn in specific situations, they can be displayed every day.
Another way to rationalize expensive purchases is by considering the « cost per entertainment hour. » For example, Professor Paul Dolan of the London School of Economics justified his Rolex by its daily value.
It’s extremely good value for money because it makes me feel good every single day when I put it on. And in 20 years time I’ll give it to my son.
This metric also explains why a $100 video game is a rational purchase for a young person. If they play it for 100 hours, the cost is just $1 per hour, which is much cheaper than going to the cinema. Similarly, buying a large television can be a very rational decision for those with less disposable income, as it provides a spectacularly cheap source of long-term entertainment. This is especially true when more expensive hobbies like Porsche racing or attending the opera are not feasible options.
However, this behavior is complex. Books like « The Status Game » by Will Storr suggest that deep down, many of our actions are driven by a desire to show off or establish status, which can be a depressing realization. While conspicuous consumption might make a neighbor feel worse by changing their comparative frame, it’s not always the case. A car enthusiast might be delighted if their neighbor buys a Ferrari, as it gives them something to share and discuss.