Veblen Goods

Veblen Goods are a peculiar category of luxury items where demand increases as the price goes up, completely flipping the standard law of demand on its head. Named after the eccentric American economist Thorstein Veblen, these goods are not purchased despite their high price, but because of it. The exorbitant price tag serves as a public display of economic power and social status, a phenomenon Veblen famously termed “conspicuous consumption.” Think of a diamond-encrusted watch or a limited-edition supercar; its appeal lies not just in its quality but in its exclusivity. If the price were to drop, the item would lose its “snob appeal” and become less desirable to its target clientele. The high price is the entire point, acting as a billboard for the owner's wealth and success.

In a normal market, if the price of apples goes up, people buy fewer apples. Simple. This is the bedrock of economic theory. Veblen goods, however, operate in a parallel universe powered by human psychology rather than cold, hard logic. The key driver is exclusivity. A high price naturally limits the number of people who can afford an item, making it a status symbol. Owning a Veblen good signals that you are part of an elite club. This creates a feedback loop:

• A luxury brand raises the price of its iconic handbag.
• The bag is now even more exclusive and perceived as more desirable.
• Demand from status-seeking consumers increases.

This effect, however, isn't infinite. If the price rises to a truly absurd level beyond what even the target market perceives as “exclusive” and instead sees as “ridiculous,” demand will eventually fall. The magic lies in hitting that sweet spot where price perfectly communicates prestige.

While you can't buy “Veblen Good Inc.” on the stock market, the psychological principles behind them are a powerful and dangerous force for investors to understand.

Certain stocks can, at times, exhibit Veblen-like characteristics. This happens when investors flock to a stock not because its underlying business fundamentals are sound, but simply because its price is soaring. The rising price itself becomes the story, creating a powerful sense of FOMO (Fear Of Missing Out). The stock becomes a status symbol in a portfolio, a topic of conversation, and a ticket to what seems like an exclusive club of winners. Think of the frenzies around meme stocks like GameStop or the mania during the dot-com bubble. In these cases, many buyers were attracted by the skyrocketing price, not by a sober analysis of the company's intrinsic value. The higher the price went, the more people wanted in, believing it would go up forever. The stock's price became divorced from its underlying business reality.

For a value investor, the Veblen dynamic is a massive red flag. The entire philosophy of value investing, championed by figures like Warren Buffett, is to buy wonderful businesses at a fair price—or even better, a great business at a discount. This requires a rational assessment of a company's long-term worth and buying with a margin of safety. Chasing a Veblen-like asset is the polar opposite of this discipline. It means you are:

• Ignoring Value: You are buying based on price momentum and social hype, not on what the asset is actually worth.
• Embracing Risk: The high price is the asset's greatest strength and its most profound weakness. When sentiment shifts or the story breaks, the “snob appeal” vanishes, and the price can collapse with breathtaking speed, leaving latecomers holding the bag.

Understanding Veblen goods provides a crucial lesson in market psychology. Here’s what to remember:

• Focus on Why, Not What: Before buying any asset, ask yourself why you're buying it. Is it because of the company's durable competitive advantage and attractive valuation, or because everyone else is buying it and the price is going up?
• Price is What You Pay, Value is What You Get: This classic Buffett-ism is the perfect antidote to the Veblen trap. A high price rarely signals a good value; more often, it signals high expectations and high risk.
• Recognize FOMO as a Sell Signal: When you feel an overwhelming urge to buy a hot stock that everyone is talking about, take a step back. That feeling is not an investment signal; it's a psychological bias at work. Veblen goods prey on this very human desire to be part of an exclusive group. Don't let your portfolio be its next victim.