February 2009


Hey, I’ve been busy writing my thesis.

I’ve also been setting up a guinea pig-style experiment with two of my friends from HKU. Sophie and Sylvie are undergoing a challenge to moderate their spending in real life and see whether shifting consumption to virtual worlds works.

Check their blog out at http://sophieandsylvie.wordpress.com — I’m the moderator, site admin, and contextualizer. But it’s really more about them, and they’re really sweet girls.

So please check it out.

From MSNBC:

Americans are hunkering down and saving more. For a recession-battered economy, it couldn’t be happening at a worse time.

Economists call it the “paradox of thrift.” What’s good for individuals — spending less, saving more — is bad for the economy when everyone does it.

Some experts say consumers have been so shaken by how fast their wealth has shrunk, so burned by credit card debt, that they might not resume their robust spending for years, if ever.

“People are not saving; they are building financial bomb shelters,” said Mark Stevens, who runs a management consulting firm, MSCO, in Rye Brook, N.Y.

This article pertains directly to my master’s thesis: first, choices made by the individual that benefit the individual are not the same as those that benefit the economy and vice versa. Secondly, don’t frame the question as saving — frame the question as ‘not buying shit they don’t need and don’t have the money for.’ Americans had a negative savings rate on average for several years. We paid for stuff with credit card debt and leveraging against our houses, and I would receive six calls to refinance my mortgage per day. Every day. The article quotes Cornell’s Robert Frank, who mentions that this frenzy of consumption was unsustainable. Building a fortune on rampant consumer spending, in order to spend more yourself? Just another illusionary bubble that got popped.  And illusions die hard.

Now we’re saving hard to make up for it, and because the media tells us we should be worried (just like it told us to spend spend spend — and the ads are still there) — it reinforces the perception that we are in trouble, and that everyone else is saving, and that conformity effect is a subtle nudge towards not spending — even though the gist of the information here is that you should be spending for the good of our consumer society. Shades of 2001 with buying as a civic duty.

I don’t think that is going to work this time. This Prisoner’s Dilemma is brutal, and humans are conditioned to react twice as strongly to the idea of loss as to the idea of gain.

Matthew Conrad, a financial manager at Complete Wealth Management in Orange County, Calif., says he knows of people who drive a BMW or Mercedes and eat macaroni and cheese for dinner several nights a week. That suggests some are making an awkward shift from free-spending habits and are reluctant to give them up.

Grant McCracken theorized a remarkable idea about consumption, which he called the Diderot effect. The story goes that Diderot had a cozy little study, somewhat ramshackle but pleasing, and then he received a gift of a marvelous dressing gown from a dear friend. This dressing gown, of red velvet, made the rest of his study look shabby in comparison, so Diderot began to replace his study piece by piece until he had a fantastic room that matched the gown. And then he wrote about it.

The Diderot unity is a masterpiece of psychological connection: it asks that objects which are invested with similar qualities and meanings become grouped together and associated with each other, even if there is no actual linkage between them. For example, the BMW has more in common with the Rolex and the Bang & Olufsen coffeemaker than with Kraft Dinner; it implies that someone with a BMW should not be having to eat mac and cheese.

The Diderot effect is when the consumer decides that they need to obey the need for psychological consistency and commitment: when they choose to replace their existing goods with ones that match their lifestyle — or alternatively, reject new goods because they do not fit the existing Diderot unity. If you go down to the local farmer’s market and look for the people buying organic produce, you are going to find more Priuses than Hummers.

Diderot Unity Exhibit A: If I had a million dollars

But we would eat Kraft Dinner. Of course we would, we’d just eat more. And buy really expensive ketchups with it. That’s right, all the fanciest Dijon ketchups! Mmm. Mmm-hmm.

Diderot Unity Exhibit B: Stuff White People Like.