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Speaker 1: Welcome to brain Stuff production of I Heart Radio. Hey

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Speaker 1: brain Stuff, Lauren bog Obam Here. Let's say you're on

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Speaker 1: a first date and anxious to make a good impression.

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Speaker 1: The waiter arrives with the wine list, and your date

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Speaker 1: asks you to order a bottle for the two of you.

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Speaker 1: You know virtually nothing about wine, but you don't want

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Speaker 1: to look like an idiot or a cheap skate, so

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Speaker 1: you quickly scan the list and point to one of

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Speaker 1: the most expensive bottles on the menu. And while yes,

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Speaker 1: it is ridiculous to spend a hundred dollars on wine

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Speaker 1: that's only marginally more tasty than a twenty dollar bottle,

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Speaker 1: it's actually standard human behavior. More than a hundred years ago,

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Speaker 1: an American economist named Thorstein Veblen coined the phrase conspicuous

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Speaker 1: consumption to describe this very thing. You pick the expensive

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Speaker 1: bottle of wine not because it's five times better than

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Speaker 1: the cheaper bottle, but because you want to send a

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Speaker 1: signal to your date, I have good taste and I

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Speaker 1: can afford it. Wine is, to one example of what's

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Speaker 1: known as a Veblin good, defined as any good or

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Speaker 1: service that defies the standard relationship between price and demand. Normally,

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Speaker 1: when price goes up, demand goes down, but for Veblin

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Speaker 1: goods like wine, fine art, jewelry, and cars, the rules change.

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Speaker 1: We spoke with Ori Heffitt's, an economics professor at Cornell

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Speaker 1: University's S. C. Johnson Graduate School of Management. He explained

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Speaker 1: the high price is actually part of the attractiveness. In

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Speaker 1: Veblen's classic book, The Theory of the Leisure Class, he

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Speaker 1: says that high prices have two functions. The first is

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Speaker 1: basically marketing. Since winemakers and clothing designers know that most

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Speaker 1: consumers don't have the knowledge or interest to figure out

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Speaker 1: which products are objectively better than others, they use price

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Speaker 1: as a shorthand for quality. Consumers assume, correctly or not,

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Speaker 1: that a higher price corresponds to a higher value. The

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Speaker 1: second function of high prices is Veblin called conspicuous consumption.

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Speaker 1: In this case, the consumer's decision to buy the more

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Speaker 1: expensive option has little to nothing to do with the

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Speaker 1: actual quality and functionality of the product. The whole point

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Speaker 1: is for others to see you drinking the expensive wine,

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Speaker 1: wearing the brand name clothes, or driving the fancy car.

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Speaker 1: Hefitt said, when other people see me driving an expensive car.

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Speaker 1: That's a benefit in itself. They might think that I'm

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Speaker 1: more successful or that I'm more desirable as a mate.

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Speaker 1: And of course those two functions of high prices often

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Speaker 1: work together. And just look at the recent college admissions scandal,

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Speaker 1: in which wealthy celebrities were caught trying to buy admission

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Speaker 1: for their children into elite colleges. One of the ways

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Speaker 1: that schools market themselves as elite is through their high

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Speaker 1: tuition costs. If the University of Southern California costs more

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Speaker 1: than seventy seven thousand dollars a year tuition plus room

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Speaker 1: and board, it must be an amazing education, right. And

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Speaker 1: because schools like the University of Southern California use their

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Speaker 1: high cost as a signifier of quality, so do parents.

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Speaker 1: The wealthy celebrities caught up in the college admission scandals

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Speaker 1: were willing to go to a great expense to win

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Speaker 1: brand name status for their kids in their social circles.

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Speaker 1: Admission to USC is shorthand that their kids are smart

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Speaker 1: and successful, which in turn means that they, as parents

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Speaker 1: are also smart and successful. Call it the virtuous circle

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Speaker 1: of conspicuous consumption. Unless you get caught cheating. Vevlin first

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Speaker 1: identified conspicuous consumption among the American upper classes in the

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Speaker 1: late eighteen hundreds, but it wasn't until the nineteen seventies

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Speaker 1: that economists figured out exactly how it worked as a

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Speaker 1: market force. In seventy three, the economist Michael Spence wrote

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Speaker 1: a landmark paper on signaling in which he showed how

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Speaker 1: our consumer choices send important signals that have real economic repercussions.

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Speaker 1: Spence one the two thousand one Nobel Prize in Economics

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Speaker 1: by explaining how education is used as a signal for

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Speaker 1: produc activity in the labor market. The logic is pretty simple.

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Speaker 1: If an employer is looking to hire a new worker,

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Speaker 1: he or she will use the status of the applicants college,

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Speaker 1: in which tuition cost is variable, as a shorthand signal

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Speaker 1: of the applicants relative productivity as a worker. Hefits cites

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Speaker 1: the classic example of someone looking to hire a lawyer.

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Speaker 1: The assumption is that a good lawyer wins cases and

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Speaker 1: therefore has a lot of money. So if one lawyer

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Speaker 1: shows up driving a two thousand four Honda Civic and

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Speaker 1: the other arrives in a brand new Mercedes, they're sending

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Speaker 1: two very different signals. If the client defines a good

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Speaker 1: lawyer by how rich here she is, then the Mercedes

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Speaker 1: lawyer benefits from conspicuous consumption. Of course, a great lawyer

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Speaker 1: could be thrifty, or a lousy lawyer could still drive

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Speaker 1: a fancy car. But there's a far higher cost for

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Speaker 1: an unsuccessful lawyer to buy a Mercedes. Hefitz said. For

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Speaker 1: the good lawyer who actually makes a lot of money,

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Speaker 1: the Mercedes is pocket change. It's cheaper and therefore more

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Speaker 1: likely for a successful lawyer to send the same signal.

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Speaker 1: The larger question is why do we bother with all

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Speaker 1: of these signals anyway? Hef It says that there's a

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Speaker 1: much more efficient economic solution. Instead of buying a fancy

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Speaker 1: car to show how rich you are, you could just

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Speaker 1: walk around with copies of your most recent tax returns,

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Speaker 1: or introduce yourself to potential clients by saying, hey, I'm

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Speaker 1: very wealthy and successful. But of course that's not socially acceptable. Instead,

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Speaker 1: people who spend money on flashy cars or clothing can

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Speaker 1: hide behind what economists call a functional alibi. If you

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Speaker 1: buy a very expensive car, for example, you can claim

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Speaker 1: that you didn't do it to send the signal that

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Speaker 1: you're rich and successful. But simply because expensive cars run

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Speaker 1: better and are more reliable or have better features, have

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Speaker 1: it said, But are they so much better that it's

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Speaker 1: worth spending twenty times the cost of a good standard car.

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Speaker 1: Probably not. Today's episode was written by Dave Ruse and

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Speaker 1: produced by Tyler Clang. Brain Stuff is a production of

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Speaker 1: I Heart Radio's How Stuff Works. For more on this

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Speaker 1: and lots of other economical topics, visit our home planet,

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