Friday, 16 May 2008

Is Status Seeking Rational?

A Knowledge at Wharton article titled Conspicuous Consumption and Race: Who Spends More on What claims that poor people in poor areas spend more on status symbols than poor people in rich areas. For example, poor people in Alabama spend more on highly visible status symbols than poor people in Massachusetts. The reason why is because poor people in Alamaba who buy status symbols can stand out because everyone else around them is poor. However, in Massachusetts, where most people are rich, a poor person buying status symbols will not stand out at all.

The article claims that it is not right to criticize those who buy visible status symbols because they may be using it for networking and job hunting. Most people thinking wearing nice clothes to a job interview is a good idea. However, most jobs, maybe 70 per cent, are found through networking. When networking, you don't go to formal job interviews. Rather, you go to dinner with your networks, play golf, etc. The dinner, the golf game, etc are the interviews. If it's okay to wear a suit to an interview because first impressions matter, then why is it not okay to wear certain clothes while networking or to drive a certain type of car? If first impressions matter, and you knew that cars do make an impression on people, why wouldn't you drive a nicer car?

If this networking hypothesis of status symbols is correct, I suspect that using status symbols to further your career is a high-risk investment. Status symbols almost by definition are expensive. You are gambling a lot of money on something with the hope that this expensive status symbol will impress a potential employer. The status symbol is just one thing you are trying to use to impress the employer. You still have to show basics like communication skills, computer skills, and so forth. Variations in what the employer will want and so on mean that using status symbols for leverage in the job market is high-risk. Some people claim that it's more suitable for rich people who can afford status symbols while poor people who buy status symbols for job market success may lose their whole life earnings and thereby may starve to death.

This I believe is why rich people tend to get university education. There are two schools of thought on university education. Some believe you actually learn things in university that make you more productive. Most, however, believe university is simply a status symbol. If it isn't, why is a Harvard degree so valuable? High-status degrees are those that are costly, either in money terms or difficulty of subject matter. By getting a high-cost degree you signal to others that you have the ability to withstand great pain. This is the same as status symbols like luxury cars. A luxury car is high cost, and you have to make a lot of money to get one. That is, you have to work hard to get a luxury car.

Many poor people believe getting a university degree is the only way for them to escape their position in life. However, if the university degree is merely a status symbol, then getting a university degree is akin to them taking out massive loans to buy a Mercedes with the hope that they can impress potential employers. Furthermore, in Australia the Government, believing in the goodness of university degrees, subsidizes fees for local students. This is akin to the Government lowering the price on luxury cars. What this would do is make the luxury car no longer a status symbol since everyone has it. What I predict we will see in the future then is more and more people wasting time and money in university. The big winners from this will be the education providers.

I believe that status seeking is unavoidable if you want to earn money. Status seeking is an investment. And just as investment in the share market can be risky or safe depending on how you invest, so too investment in in status symbols in the job or labor market can be risky or safe depending on how you invest. A safe, low-cost status symbol may include such things as combing your hair nicely or wearing nice clothes. Then there are high-risk status symbols like buying a Lexus or a yacht. My solution is to status seek according to your wealth and stop yourself from going any further. Once you have enough wealth, stop status seeking.

The Wharton article claims that older people who have retired buy fewer status symbols than younger people, likely because older people are not looking for jobs and have less need to make good first impressions.

I believe status seeking not only applies to goods like luxury cars, university degrees, or business attire, but also to behavior and speech. Some ways of speaking are used to convey status. When you are at a job interview and you tell the interviewer that you are good (e.g. you say, "I have a degree from Harvard.") then you are status seeking. A university degree is not as visible as a car. You can hang it up on a wall, but a more effective way to advertise is to simply tell other people that you have a Harvard degree. The same can be said about accents. In Britain the received pronunciation also known as Queens English is associated with Royalty. Some people then try to affect that accent in order to sound good. Other status symbols may include jobs. Some jobs carry more prestige than others because of perceived earning potential. Saying that you are a CEO, doctor, or lawyer, is likely to impress people regardless of whether you are capable of saving money effectively. These impressions are colored mainly by unintentional (or maybe intentional) marketing from television from shows that glamorize these prestige occupations, such as The Practice or House.

The Wharton article claims that mutual funds tend not to be status symbols because they usually are invisible. If I put money into my mutual fund, I do so by transferring money from my bank account to the fund management organization. Nobody sees anything. As a result, I get no thrill from letting others know that I invest. However, I do have a net worth badge that I display on the bottom of this blog. However, I say to myself that I use this to track whether I am reaching my goals or not. I also tell other people that I have a managed fund, which may also be form of status seeking. I have tried not to do these things, that is I try not to tell others that I have a managed fund or even a university degree, and the reason why is because I am now aware of these dynamics and because I want people not to be envious of me or to hate me. Merely because of prejudice, different status symbols provoke more envy and hatred than others. For example, university degrees tend to be admired. Luxury cars tend to be envied.

In the mutual fund world, just about everyone has a mutual fund. In America, 401(k) plans mean that everyone has a mutual fund they use to invest for their retirement. That same applies in Australia. Everyone has a compulsory superannuation fund they use to fund retirement. Thus a managed fund is not really that impressive. This is why many rich people like to invest in hedge funds. The hedge fund is a misnomer since most hedge funds don't hedge their bets like they used to. Hedge funds are high-risk, unregulated investments not available to the public. You must be an experience investor (SEC defines an experienced investor as someone with net worth over $1 million) to invest in hedge funds. Because of this exclusivity and high cost, hedge funds have become status symbols. Good hedge funds can make investors lots of money but bad ones can leave you bankrupt. In the same way a brand new Mercedes loses many thousands of dollars in depreciation per year, investing in a hedge fund and losing money shows others that you are so rich you can waste it on depreciating assets and not even care.

I lump status seekers into two types: investors, those who use status symbols in a conscious and calculated way to to get a job; and compensators, those who use status symbols to compensate for feeling of inadequacy. Of course, people may look for jobs because of feelings of inadequacy and low self-esteem, so these two types may simply be one universal type.

I believe status seeking is deeply entrench in society and is ingrained in human behavior. I believe I too am tempted by the desire to seek status in the same way that humans are tempted by the desire to have sex. In fact, status seeking and sex may be related since status seeking can be used to facilitate reproduction.

However, I do believe that even if instincts drive us to do something, we humans have a propensity to regret what our instincts tell us to do, and because of this it is prudent for a conscious, aware individual to suppress his instincts.

For Christians, the Bible states that coveting another person's belongings is sinful. Furthermore, when we dress we must dress modestly and not emphasize outer appearances. It is what is inside us that counts.

No comments: