AI Wealth Truth (17): Why Higher Prices Can Make You Buy More

I. Economics 101 teaches: when price rises, demand falls. That is the basic shape of the demand curve. Things get expensive, fewer people buy. Intuitive. But in the real world, there is a class of goods that violates this rule completely. The higher the price, the better it sells.

II. These are called Veblen goods. Named after the 19th-century economist Thorstein Veblen. In The Theory of the Leisure Class, he described "conspicuous consumption". People buy certain goods not for their functional value, but because the high price itself is the point.

III. A classic case: a jewelry shop could not sell its turquoise. The owner told the clerk to cut the price in half to clear inventory. The clerk misunderstood and doubled the price. Result: it sold out within days. High prices made customers assume the turquoise was premium.

IV. This reveals a cognitive bug: we use price as a signal of quality. Under incomplete information, we cannot evaluate true quality. We use "expensive" to infer "good". Often it is a useful shortcut. But it is also exploited systematically by sellers.

V. Luxury brands understand this deeply. LV, Hermes, Patek Philippe. They do not discount. Discounting would damage the signal of "scarcity" and "premium". High price is a core asset of the brand, not an obstacle.

VI. More interesting: the same product, with different price tags, gets different consumer ratings. Researchers had participants taste the same wine but told them different prices. The "90-dollar" wine was rated higher than the "10-dollar" wine. Brain scans show price information actually changes the brain's taste-experience circuits. You do not just "think" the expensive wine tastes better. You actually "feel" it tastes better.

VII. This is a variant of the placebo effect. An expensive painkiller works better than a cheap one, even with identical ingredients. An expensive wine feels more enjoyable, even if it is the same bottle. Price changes expectation. Expectation changes experience.

VIII. There is a deeper psychological mechanism: identity signaling. You buy expensive things not to use them, but to let others know you can afford them. This is what Veblen called "conspicuous consumption".

IX. Evolutionary psychology offers an explanation. In ancestral societies, status meant better mating chances and survival resources. Displaying wealth was a way to display status. Ancestors who could display wealth were more likely to pass on genes. We inherited the "show-off" instinct.

X. In modern society, this instinct is exploited by commerce. Luxury goods are not mainly sold to the "truly rich". The truly rich do not care about logos. Luxury goods are sold to people who want others to think they are rich. The middle class is the core customer base.

XI. Data supports this. In China, the largest LV consumer group is not billionaires, but white-collar workers in top-tier cities. They spend several months of salary on a bag. Then they display it on social media, on the subway, at the office. They are not buying a bag. They are buying an identity label.

XII. What does this do to wealth accumulation?

XIII. Impact 1: you pay a massive premium for a "signal". An LV bag's cost might be a few hundred, materials plus manufacturing. The retail price is tens of thousands. The gap is brand premium and signal value. You pay tens of times the cost to buy the feeling of being seen as rich.

XIV. Impact 2: it is an arms race with no winners. You buy a designer bag to signal status. Your colleague buys one too. Your relative status does not rise. But you both spend a lot of money. Everyone is poorer. No one's relative status improves.

XV. Impact 3: luxury spending crowds out real wealth accumulation. Money spent on luxury goods could have been invested. Suppose you spend 20,000 on luxury goods every year. If you invest it at an 8% annual return, after 30 years it becomes more than 2 million. You are not buying a bag. You are giving up 2 million of future wealth.

XVI. Some say: dressing well helps your career. Research shows: the marginal returns of clothing diminish fast. Going from sloppy to decent has huge returns. Going from decent to designer labels has small returns. Going from ordinary designer brands to top luxury has almost no extra return. After "good enough", most extra spending is waste.

XVII. In the AI era, the effect is amplified. Social media broadens the reach of conspicuous display. On Instagram, you can show luxury goods to tens of thousands. That raises the perceived "return" of showing off. It also increases the pressure to join the arms race.

XVIII. AI recommendation algorithms will also push more luxury goods based on your purchase history. "You bought an LV bag. You may also like this Chanel." Algorithms lock you into an ever more expensive consumption loop.

XIX. The influencer economy exploits this too. Influencers display a luxury lifestyle. Followers envy and want to imitate. Then they buy the same items. Your attention is sold to luxury brands. Your money follows.

XX. There is an even subtler Veblen effect: "expensive" equals "effective". Is an expensive course necessarily better than a cheap one? Is an expensive supplement necessarily more effective? Is a paid consulting service necessarily more valuable than free information? Not necessarily. But the brain tends to believe it. You pay a premium for the reassurance high prices give you.

XXI. How do you fight this bias?

XXII. 1. Ask yourself: am I buying function or a signal? If it is a signal, ask what that signal is worth. 2. Calculate the opportunity cost. If you invest this money for 30 years, what does it become? 3. Recognize the futility of an arms race. You can never "win". Someone will always spend more.

XXIII. Real wealth is not for display. Buffett lives in the house he bought 60 years ago. Zuckerberg wears $10 T-shirts. Showing off is new-money behavior. Old money does not need to prove itself.

XXIV. High price does not imply high quality. High price may only imply high gross margins. Next time you buy because "expensive means good", pause and ask: does this price reflect cost, or your vanity? In the AI era, your vanity is easier than ever to track, analyze, and exploit.