These people cannot be millionaires! They don’t look like millionaires, they don’t dress like millionaires, they don’t eat like millionaires, they don’t act like millionaires – they don’t even have millionaire names. Where are the millionaires who look like millionaires?
So starts the book The Millionaire Next Door, the classic study of how most rich people got rich. The quote is from a salaried, middle manager in a large bank, talking about people that were financially independent.
His view of millionaires is shared by most people who are not wealthy. He thinks that millionaires drive expensive cars, wear expensive clothes, watches and other status symbols. Wrong!
The reason he is Wrong is perhaps best expressed by those wise and wealthy Texans who have a phrase for consumer suckers, financial advisers and others showing off in the Prison Camp:
Big Hat, No Cattle
There is a world of difference between looking rich and actually being rich. Many people buy shit they can’t really afford in an attempt to persuade you that they are more successful than they really are, often using debt to do this. Personally, I’ve never been a big fan of showing off in this way. But I’ve noticed that it’s a widely used tactic.
One hazard of writing a blog about financial independence is that people often don’t believe you at first. But there comes a point where people realise its true. For example, I sometimes give financial coaching at my house. There are several advantages to this. One is that I am not commuting, clogging up the roads or burning petrol. Another is that its a quiet environment where clients are away from work stress and distractions. But I’ve noticed another advantage. Seeing is believing. So by the time they’ve seen the house, my bike and maybe met my wife or my children, clients are often thinking something like:
Blimey, so all that stuff on the blog was actually true!
In life generally, some scepticism is healthy. There are lots of bullshit vendors out there and we all have to learn to separate the wheat from the chaff, the signal from the noise.
Imagine you are a 19 year old girl going on a first date with Wayne (20) who you met down at the local Wetherspoons pub.
Wayne arrives to pick you up in a shiny red Ferrari. Now there are 2 possibilities. Its possible that Wayne really is the wealthy businessman / tech entrepreneur that he said he was. The alternative is that he’s rented the car for the day / weekend. There really are companies that make money from renting out trophy cars for short periods to the financially challenged.
Let’s look closer at what is going on here. Wayne is using a tactic called “signalling” by biologists and economists. He is signalling that he owns a Ferrari, has high status and is capable of delivering resources. This is also known as “fronting and maxxing” by rappers.
All humans, all mammals and most creatures on the planet use this tactic to some extent. They use signals to convey information about themselves. These signals can be deployed in different ways but here we’re talking about signals of resources and status. In the natural world, signals provide information as to the fitness of the animal displaying the signal.
The most famous example of this is the peacock’s tail. The peacock’s tail is a display provided by (male) peacocks to the surrounding (female) peahens.
For many years, this was a puzzle to biologists. Why would peahens favour a tail that was visible to predators and costly to maintain in terms of biological resources? (food, calories, nutrients, blood supply, muscle requirements etc etc). This makes no sense from a “survival of the fittest” perspective.
There are 2 forms of selection going on in evolution. Survival of the fittest is the one that people usually know about. We’ve seen the Planet Earth type nature documentaries and we know that, when there are lions around, its the slow and the lame wilderbeest that don’t enjoy the end of the movie. That’s survival of the fittest.
But the other way that evolution selects genes is by sexual selection. Sexual selection operates by the choices that animals make about who they mate with. You could think of it as survival of the sexiest.
Back to peacocks. The peahens prefer large beautiful tails when choosing a mate. Why? Peacock’s tails are not efficient in everyday life. But they are an important signal for mating precisely because they are inefficient and costly for the peacocks. A large tail takes more effort, more food, more strength to maintain. It’s highly visible so tends to attracts predators as well as the opposite sex. So to carry this burden, the peacock must be particularly fit and healthy.
In humans, the equivalent of the peacock’s tail is the trophy house (complete with high maintenance garden, swimming pool etc), the ridiculously expensive to maintain supercar and so on. Its not an accident that these trophy houses and cars are wasteful; that’s kind of the point from a signalling perspective.
In nature, each time a species carves out an ecological niche using a signalling strategy, this is gives rise to the potential for a strategy of mimicry, to “free ride” on the back of the original honest signal. In other words, for every creature that is genuinely strong or poisonous or otherwise well adapted to their environment, there is another that is just mimicking the signs of strength, toxins or wealth.
What does that look like? Well, imagine the poisonous snake that advertises to foxes and eagles that they are poisonous via bright red colours or stripes: nature’s version of a warning signal. For each poisonous snake, there is usually another species that replicates these markings yet is not actually poisonous.
If you are thinking that this is just stuff you see on nature documentaries and doesn’t apply to humans, then you’re mistaken. We humans are not above or separate from nature, we are part of nature.
In humans, mimicry is a widely used strategy where people fake the signals of wealth. So they buy knock off designer handbags or sunglasses from Hong Kong. Or they buy real shit (cars, houses, boats etc) that they can’t really afford, using credit card debt or mortgages.
Words are cheap. So the best signals are honest and hard to fake. A peacock can not fake a large, beautiful tail. The peacock can not bullshit the peahens with what economists call “cheap talk”. The beautiful tail provides evidence of an underlying trait that is valued by the females. The beauty lies not just in the aesthetics but also in the reliability of the signal.
Back to people. If you live in Texas and want to show off, what do you do? Well, its easy to buy a fancy Stetson, cowboy boots and a big pickup truck on debt finance. That’s Big Hat, No Cattle.
But it’s much harder to have a million dollars in Vanguard ETFs or a house with no mortgage. Those are real and productive assets, impossible to fake. Its a bit of a paradox that in consumer society, these are invisible. You can see the house but you can’t see the mortgage (or lack of mortgage).
To understand consumer society, you have to understand that males are competing via their ability to buy pointless shit for the females (as well as for themselves). And the females are competing via their ability to buy stuff like handbags, shoes, make-up etc that might impress the other females as well as the males. But its pretty obvious to me that if your goal is to attract or impress other people, there are more effective ways to do that without wasting lots of money on conspicuous consumption.
We humans are often tempted to bullshit ourselves and others. Its tempting, easy to do and there may be short term benefits. But, in the long run, its a losing strategy. And a big part of getting rich is learning to think longer term, thinking in terms of years and decades rather than days and weeks.
The Escape Artist has written before about the benefits of honesty. That wasn’t just some amusing / slightly preachy sermon. When you are 100% honest with yourself, you can accept that lasting happiness is not built on fake signalling but rather on buying your future freedom.
So the next time one of your co-workers or neighbours starts boasting to you about their new car, gadget or other future landfill bought with a mortgage or credit card debt, you can just smile to yourself and think:
Big Hat, No Cattle