Tuesday, May 24, 2011
Fiscal Attraction & Entrepreneurship
Fiscal Fatal attraction and idiosynchracies of entrepreneurs
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2762
How Money Impacts Marriage
When it comes to marriage, do opposites attract? Or do birds of a
feather flock together? While men and women are known to
gravitate toward mates with personal qualities similar to their own
in most respects, Wharton marketing professor Deborah Small
found the opposite to be true when it comes to money.
find that stingy spenders tend to marry those who splurge freely,
and vice versa. The pattern amounts to "fatal attraction," the
researchers argue, because it causes conflicts over money and
thus has a negative effect on marital well-being.
"There's a lot of academic literature and interest in individual
decision making, [but what has been] largely neglected is that
people are often making decisions jointly and the outcomes of
financial decisions affect other people," Small says. "It's important
to understand that even though two individuals are involved in a
decision and are being affected by it, their attitudes and
preferences may not be aligned."
he majority of relationship research suggests that people are
attracted to those with similar demographic characteristics,
attitudes, values and even names. But Small and her co-authors
based their hypothesis of spendthrift/tightwad attraction on a
theory that men and women also tend to seek out a mate who
has qualities that are the stark opposite of those they most strongly
deplore in themselves -- in this case, the tendency to spend too
much or too little.
Two subsequent experiments asked different sets of respondents to
rate their own and their spouses' behavior on the spendthrift-
tightwad scale. In both cases, the researchers found that stingy
spenders were more likely to be married to profligates and high-
rollers gravitated toward the miserly.
People might think "that someone on the other end of the
spectrum might heal them in some way," Rick notes. "If I'm a
tightwad, I want to find a spendthrift to loosen me up, because
tightwads by definition want to loosen up. Spendthrifts also by
definition want to change their behavior.... They might think that
an opposite would help reel in that misbehavior. That [is not] what
we find."
Even though these couples may have assumed that marrying an
opposite when it came to money would balance out their own
behavior and lead to greater financial health, Small and her co-
authors discovered that such matches did not necessarily make for
happier relationships. Indeed, the research shows that conflicts
over money created more marital strife for these "opposites
attract" couplings. "We have some findings suggesting that two
spendthrifts are happier than a spendthrift and a tightwad [even
though] two spendthrifts are much more likely to end up in debt
and have other financial problems," Small says. "It's not clear that
what makes you happier is also going to make you more financially
secure."
the current findings suggest that couples should talk about
financial habits and practices early on in a relationship, and form a
set of shared expectations, plans and goals. "I think doing that
helps people recognize if the differences are too broad to
overcome," she adds.
"Entrepreneurs create so much wealth in our society, but we don't
understand what makes a person become an entrepreneur," says
Wharton finance professor Nikolai Roussanov. "This question of 'why'
is fascinating for economists because entrepreneurs benefit society
as a whole to such a great degree. We would be worse off without
them."
"Why do certain people take the entrepreneurial leap?"
His conclusion is that entrepreneurs have unique social aspirations
that other people typically don't share. "They weigh risks and
outcomes differently," he notes, which leads to atypical, but
rational, conclusions about risks and opportunities. Contrary to
common perception, entrepreneurs are not less averse to taking
chances; they simply view relative hazards with a different eye.
Socially, Roussanov says, aspiring entrepreneurs do not want to
merely keep up with the proverbial Jones; they want to get
marginally ahead of them. "Absolute wealth is not as important to
them as relative wealth." Entrepreneurs also save more and spend
less as a portion of their incomes than other people, according to
Roussanov. The consumptive value of money isn't their motivation.
Rather it's the social esteem that comes with achieving
incrementally greater wealth than they had previously, and than
their perceived peer group has. Of course, "Who 'the Jones' are
changes as you progress," Roussanov points out. "First you think, 'I
know these guys are successful and I would like to be like them.' But
as you progress, you change your comparisons. You want to be in
the Forbes 400, then in the top 10 and so forth.
In his paper, Roussanov notes that "if the satisfaction brought by
'getting ahead of the Joneses' outweighs the danger of falling
behind, risky activities with highly idiosyncratic payoffs, such as
entrepreneurship, can be particularly attractive." By contrast,
"Other people may not have this preference for status. They look at
the risks and say, 'This is too much for me.'"
What is perplexing about an entrepreneur's endeavors, Roussanov
adds, is that, "from an economist's point of view, the risk in
entrepreneurial ventures is high." These people "commit a large
fraction of their human and financial capital to their ventures, thus
exposing themselves to large undiversified risks," he writes in the
paper. "Economic theory predicts that higher risk should be
compensated by higher average return, [yet] returns on
undiversified entrepreneurial investments are no higher than the
average return on publicly traded equity."
For Luxury Goods Aficionados, Knowledge Equals Wealth
Many consumers buy high-end products to signal wealth and
status to those around them, aided by explicit branding such as a
large Mercedes symbol on the front of a car. But if consumers buy
expensive goods in part to clearly communicate things like status
to others, why would shoppers spend thousands of dollars on
handbags or other goods that have no visible logos?
In the paper, "Subtle Signals of Inconspicuous Consumption,"
Wharton marketing professor Jonah Berger and Morgan Ward, a
marketing professor at Southern Methodist University, suggest that
manufacturers of consumer goods wanting to sell to a high-end,
niche customer base should offer exclusive product lines with
smaller logos and more subtle branding elements. Based on studies
of consumer preference among ordinary shoppers and those who
were more fashion conscious, the researchers found that "insiders"
in a given consumption range (e.g., fashionistas, car enthusiasts,
etc.) prefer products that identified them as being "in the know"
only to a select group of peers.
The consumer study groups examined products with both highly
visible branding, such as the word "Gucci" emblazoned in tall
letters on a handbag, and more subtle signals of price -- for
example, the signature cherry-red soles on Christian Louboutin
shoes.
The majority of "typical" consumers preferred the products with
larger brand identifiers, and tended to misidentify products with
subtler branding. Among products with subtle signals, "typical"
consumers "thought the high-priced options were no more
expensive than their cheap alternatives," the authors write. But
the "insiders," in this case fashion students or people with an affinity
for high fashion, not only could tell the difference between a low-
cost generic item and a high-priced item with a tiny logo, but also
preferred the subtly-branded products.
To understand such "insider" shoppers, companies need to realize
that the handbag these shoppers carry or shoes they wear is
largely about sending signals, Berger notes, almost like
communicating a coded message to members of a select group.
"A Rolex is a widely recognized status symbol, but might be looked
down upon by true watch enthusiasts," the paper states. "A
Vacheron Constantin, on the other hand, will be invisible to most
people, but respected by watch aficionados."
Another lesson, conversely, is that being selective with branding
techniques comes with risk. A consumer goods company that
wants to target high-end shoppers might select a subtle pattern or
small logo, but that could turn off the majority of shoppers -- those
who can't tell the difference between a cheaper product and the
expensive item."Most people think a $6,000 Bottega Veneta bag is
no more expensive that a cheap Wal-Mart bag that has no logo,"
Berger says.
According to Berger and Ward, from the point of view of an
"insider," being identified as such is vitally important, to the point
that they will opt for possibly being mistaken for lower-end shoppers
by the masses in exchange for recognition by their fellow high-
fashion fans. The researchers also suggest that "discretely marked
products, subtle but distinct styles or high-end brands that fly
beneath the radar" have a longer life on the market than their less
expensive, more loudly branded alternatives.
"The value of signals is that they distinguish social groups, so when
outsiders start copying insiders' signals, insiders may abandon that
product and search for a new signal," Berger says. "Because explicit
signals, like large logos, are easier to observe, they are more likely to
be poached or copied, and thus more likely to eventually be
abandoned in favor of a new group marker."
That has clear implications for products with explicit brand
markings, even on expensive high-end products. "Explicit status
symbols may generate large sales in the short term, but this will only
persist if enough of the buyers are truly wealthy," the researchers
write. "If not, the symbolic value will shift towards being a marker of
the wannabe rich, and sales will decline as consumers search for
the next aspirational symbol."
More generally, the researchers suggest, the role of wealth as a
status marker is changing, being replaced by knowledge or
"cultural capital." With the expansion of credit and leasing
programs, and the wider availability of knockoff items, "it is a lot
easier now for someone who is not truly wealthy to be able to
purchase something that seems expensive," Berger notes. "Cultural
capital, though, remains elusive. Acquiring the right knowledge
requires time, effort and the right connections -- things that are
hard to fake."
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2762
How Money Impacts Marriage
When it comes to marriage, do opposites attract? Or do birds of a
feather flock together? While men and women are known to
gravitate toward mates with personal qualities similar to their own
in most respects, Wharton marketing professor Deborah Small
found the opposite to be true when it comes to money.
find that stingy spenders tend to marry those who splurge freely,
and vice versa. The pattern amounts to "fatal attraction," the
researchers argue, because it causes conflicts over money and
thus has a negative effect on marital well-being.
"There's a lot of academic literature and interest in individual
decision making, [but what has been] largely neglected is that
people are often making decisions jointly and the outcomes of
financial decisions affect other people," Small says. "It's important
to understand that even though two individuals are involved in a
decision and are being affected by it, their attitudes and
preferences may not be aligned."
he majority of relationship research suggests that people are
attracted to those with similar demographic characteristics,
attitudes, values and even names. But Small and her co-authors
based their hypothesis of spendthrift/tightwad attraction on a
theory that men and women also tend to seek out a mate who
has qualities that are the stark opposite of those they most strongly
deplore in themselves -- in this case, the tendency to spend too
much or too little.
Two subsequent experiments asked different sets of respondents to
rate their own and their spouses' behavior on the spendthrift-
tightwad scale. In both cases, the researchers found that stingy
spenders were more likely to be married to profligates and high-
rollers gravitated toward the miserly.
People might think "that someone on the other end of the
spectrum might heal them in some way," Rick notes. "If I'm a
tightwad, I want to find a spendthrift to loosen me up, because
tightwads by definition want to loosen up. Spendthrifts also by
definition want to change their behavior.... They might think that
an opposite would help reel in that misbehavior. That [is not] what
we find."
Even though these couples may have assumed that marrying an
opposite when it came to money would balance out their own
behavior and lead to greater financial health, Small and her co-
authors discovered that such matches did not necessarily make for
happier relationships. Indeed, the research shows that conflicts
over money created more marital strife for these "opposites
attract" couplings. "We have some findings suggesting that two
spendthrifts are happier than a spendthrift and a tightwad [even
though] two spendthrifts are much more likely to end up in debt
and have other financial problems," Small says. "It's not clear that
what makes you happier is also going to make you more financially
secure."
the current findings suggest that couples should talk about
financial habits and practices early on in a relationship, and form a
set of shared expectations, plans and goals. "I think doing that
helps people recognize if the differences are too broad to
overcome," she adds.
"Entrepreneurs create so much wealth in our society, but we don't
understand what makes a person become an entrepreneur," says
Wharton finance professor Nikolai Roussanov. "This question of 'why'
is fascinating for economists because entrepreneurs benefit society
as a whole to such a great degree. We would be worse off without
them."
"Why do certain people take the entrepreneurial leap?"
His conclusion is that entrepreneurs have unique social aspirations
that other people typically don't share. "They weigh risks and
outcomes differently," he notes, which leads to atypical, but
rational, conclusions about risks and opportunities. Contrary to
common perception, entrepreneurs are not less averse to taking
chances; they simply view relative hazards with a different eye.
Socially, Roussanov says, aspiring entrepreneurs do not want to
merely keep up with the proverbial Jones; they want to get
marginally ahead of them. "Absolute wealth is not as important to
them as relative wealth." Entrepreneurs also save more and spend
less as a portion of their incomes than other people, according to
Roussanov. The consumptive value of money isn't their motivation.
Rather it's the social esteem that comes with achieving
incrementally greater wealth than they had previously, and than
their perceived peer group has. Of course, "Who 'the Jones' are
changes as you progress," Roussanov points out. "First you think, 'I
know these guys are successful and I would like to be like them.' But
as you progress, you change your comparisons. You want to be in
the Forbes 400, then in the top 10 and so forth.
In his paper, Roussanov notes that "if the satisfaction brought by
'getting ahead of the Joneses' outweighs the danger of falling
behind, risky activities with highly idiosyncratic payoffs, such as
entrepreneurship, can be particularly attractive." By contrast,
"Other people may not have this preference for status. They look at
the risks and say, 'This is too much for me.'"
What is perplexing about an entrepreneur's endeavors, Roussanov
adds, is that, "from an economist's point of view, the risk in
entrepreneurial ventures is high." These people "commit a large
fraction of their human and financial capital to their ventures, thus
exposing themselves to large undiversified risks," he writes in the
paper. "Economic theory predicts that higher risk should be
compensated by higher average return, [yet] returns on
undiversified entrepreneurial investments are no higher than the
average return on publicly traded equity."
For Luxury Goods Aficionados, Knowledge Equals Wealth
Many consumers buy high-end products to signal wealth and
status to those around them, aided by explicit branding such as a
large Mercedes symbol on the front of a car. But if consumers buy
expensive goods in part to clearly communicate things like status
to others, why would shoppers spend thousands of dollars on
handbags or other goods that have no visible logos?
In the paper, "Subtle Signals of Inconspicuous Consumption,"
Wharton marketing professor Jonah Berger and Morgan Ward, a
marketing professor at Southern Methodist University, suggest that
manufacturers of consumer goods wanting to sell to a high-end,
niche customer base should offer exclusive product lines with
smaller logos and more subtle branding elements. Based on studies
of consumer preference among ordinary shoppers and those who
were more fashion conscious, the researchers found that "insiders"
in a given consumption range (e.g., fashionistas, car enthusiasts,
etc.) prefer products that identified them as being "in the know"
only to a select group of peers.
The consumer study groups examined products with both highly
visible branding, such as the word "Gucci" emblazoned in tall
letters on a handbag, and more subtle signals of price -- for
example, the signature cherry-red soles on Christian Louboutin
shoes.
The majority of "typical" consumers preferred the products with
larger brand identifiers, and tended to misidentify products with
subtler branding. Among products with subtle signals, "typical"
consumers "thought the high-priced options were no more
expensive than their cheap alternatives," the authors write. But
the "insiders," in this case fashion students or people with an affinity
for high fashion, not only could tell the difference between a low-
cost generic item and a high-priced item with a tiny logo, but also
preferred the subtly-branded products.
To understand such "insider" shoppers, companies need to realize
that the handbag these shoppers carry or shoes they wear is
largely about sending signals, Berger notes, almost like
communicating a coded message to members of a select group.
"A Rolex is a widely recognized status symbol, but might be looked
down upon by true watch enthusiasts," the paper states. "A
Vacheron Constantin, on the other hand, will be invisible to most
people, but respected by watch aficionados."
Another lesson, conversely, is that being selective with branding
techniques comes with risk. A consumer goods company that
wants to target high-end shoppers might select a subtle pattern or
small logo, but that could turn off the majority of shoppers -- those
who can't tell the difference between a cheaper product and the
expensive item."Most people think a $6,000 Bottega Veneta bag is
no more expensive that a cheap Wal-Mart bag that has no logo,"
Berger says.
According to Berger and Ward, from the point of view of an
"insider," being identified as such is vitally important, to the point
that they will opt for possibly being mistaken for lower-end shoppers
by the masses in exchange for recognition by their fellow high-
fashion fans. The researchers also suggest that "discretely marked
products, subtle but distinct styles or high-end brands that fly
beneath the radar" have a longer life on the market than their less
expensive, more loudly branded alternatives.
"The value of signals is that they distinguish social groups, so when
outsiders start copying insiders' signals, insiders may abandon that
product and search for a new signal," Berger says. "Because explicit
signals, like large logos, are easier to observe, they are more likely to
be poached or copied, and thus more likely to eventually be
abandoned in favor of a new group marker."
That has clear implications for products with explicit brand
markings, even on expensive high-end products. "Explicit status
symbols may generate large sales in the short term, but this will only
persist if enough of the buyers are truly wealthy," the researchers
write. "If not, the symbolic value will shift towards being a marker of
the wannabe rich, and sales will decline as consumers search for
the next aspirational symbol."
More generally, the researchers suggest, the role of wealth as a
status marker is changing, being replaced by knowledge or
"cultural capital." With the expansion of credit and leasing
programs, and the wider availability of knockoff items, "it is a lot
easier now for someone who is not truly wealthy to be able to
purchase something that seems expensive," Berger notes. "Cultural
capital, though, remains elusive. Acquiring the right knowledge
requires time, effort and the right connections -- things that are
hard to fake."
Labels: Knowledge at Wharton
