Login to your new FMVA dashboard today.

Conspicuous Consumption

The act of displaying ostentatious wealth to gain status and reputation in society

What is Conspicuous Consumption?

Conspicuous consumption is the act of displaying ostentatious wealth to gain status and reputation in society. The theory was first discussed by American economist and sociologist Thorstein Veblen in his book, “The Theory of the Leisure Class,” in 1899.

In his book, Veblen says that the need to consume goods in order to flaunt one’s wealth goes back to the tribal period; although the objects of consumption have changed since then, the concept of flamboyant ownership has essentially remained the same.

 

Conspicuous Consumption

 

There are many reasons why people conspicuously consume; some say it is a result of capitalism as societies became more industrialized, while others believe that the goods we consume and own define who we are as a person.

The theory of conspicuous consumption helps us understand the important role of consumption in the growth of economic markets and modern society’s obsession with material possessions.

 

Breaking Down Conspicuous Consumption

There are many theories on conspicuous consumption, the first of which was developed by Thorstein Veblen. He claimed that there was a direct relationship between a person’s material possessions and their status in society. The “pecuniary strength” of an individual portrayed honor and esteem in a community. It involved lavish consumption of luxury goods such as jewelry.

Moreover, Veblen claimed the goods consumed by such individuals were wasteful and did not hold any practical useful value to the buyer. He termed consumption of the goods as a conspicuous waste.

In 1967, the theory was developed further by another American economist, James Duesenberry, who first described the “bandwagon” or “demonstration” effect. Duesenberry claimed that people purchased goods and services to preserve their self-esteem and keep up with societal expectations.

 

Reasons behind Conspicuous Consumption

Many theories exist as to why people consume conspicuously. Some theorists claim that it is due to the competitive nature of individuals. The ownership of luxurious goods expresses the superiority of the possessors over the non-possessors. Therefore, people compete with each other for ownership of such goods, which causes conspicuous consumption.

Another theory asserts that it is the insecurity of individuals that drives them to consume material items. People use luxury goods to hide their personal insecurities; they believe their material possessions define their public image and mask their shortcomings.

In his book, Veblen claimed that advertising plays a huge role in conspicuous consumption. When a company is advertised as a luxury brand, many people want to associate themselves with its product. This leads to conspicuous consumption as people believe they will achieve a positive self-image when they purchase luxury brand products.

 

 

Luxury Goods

 

Cultural Influence on Conspicuous Consumption

According to Veblen’s theory, people consume conspicuously for two main reasons – to be recognized by their peers and to achieve a higher social status in society. Both factors are a reflection of the culture and social or economic class that the consumers reside in.

Conspicuous consumption defines the personal and public perceptions of a person. Societies that give importance to external values are called collectivist cultures. This is because purchase decisions are largely based on the external self and the public image of a person.

According to this theory, an individual will choose products that improve their status in society rather than satisfy their personal needs. Therefore, in a collectivist culture, the main driver of conspicuous consumption is “recognition by others.”

 

Conclusion

Conspicuous consumption is a theory that is both economic and psychological. The economic conditions that an individual resides in can be a deciding factor as to whether a person decides to conspicuously consume goods or not.

While many factors contribute to conspicuous consumption, the driving force behind such activity is the desire for “recognition by others”, as Thorstein Veblen famously stated in his book.

 

More Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

  • Consumer Surplus
  • Law of Demand
  • Network Effect
  • Veblen Goods

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!