Lipstick effect on recession forecasting

May 10

The lipstick effect is the theory that when facing an economic crisis or any situation when demand and supply equilibrium is unbalanced, the consumers will be more willing to buy less costly luxury goods.

In such a case, instead of buying expensive fur coats, for example, people will buy expensive lipstick.

The underlying assumption is that consumers will buy luxury goods, even if there is a crisis. We had seen that recently in South Korea, once the re-opened shops after few weeks lockdown got an unexpectedly high number of luxury cars sold, much higher than expected. 

When consumers trust in the economy is diminishing, or when they're afraid of losing their jobs, they obviously will buy goods that have less impact on their available funds. It's rather straightforward and thus leads to conservation of previously saved funds and is very similar to our bodies, which in general preserve energy when fasting. Therefore, we have got that inherited from our ancient times and build in our DNAs. 

However based on the Lipstick effect, with a declining economy, consumers could be tempted by expensive beer or smaller, less costly gadgets.

It has been rumoured that lipstick sales doubled after the 9/11 attacks on the United States. In a New York Times article published May 1, 2008, Leonard Lauder is quoted as saying that he noted his company's sales of lipstick rose after the terrorist attacks. He also did not claim they even doubled. This has a future impacting inclination - which one may observe very soon - specifically in the places where the show-off syndrome is evident as Dubai and other countries in the Middle East. One can argue which products will get this increase in sales doubling or tripling numbers making some more rich - as inevitably people will follow the same regime as before.

More recently, a more nuanced view of the effect has come to light, rooting it in a pre-historic urge to preserve the species. The Economists tested this effect in 2009 while stating that there is no clear evidence. The other researches attributed it to evolutionary psychology when women want to attract better mates, especially in temporary weird times. I think that natural selection does not shape our behaviour directly, as it cares only about the long term fate of us to replicate. The main goal of the human mind - whatever we believe and think - is to maximise the number of copies of the genes that create it. It is well written in the fantastic book by Richard Dawkins, The Selfish Gene - which states that people don't strive to selfishly spread their genes, as the genes selfish spread themselves. While we may oppose evolutionary psychology through the DNA we behave in a certain and predictable way, which Jordan Peterson very well explained in his book of 12 Rules of Life. He argues that we have only 3-5% of free will, while the rest is somehow regulated by religion, social programming and beliefs we got in childhood time.

On the contrary, we are not as irrational as psychologists say, and even if people's thinking and judgment of probability depart from the truth, the reasoning is not necessarily illogical.

That's statement is undervalued in Thinking Fast and Slow book, where the author brings the assumption that if something happens many times, it is more likely to happen again. Thus we accept it as a sort of universal truth, trying not to questions its principles at all as that's easier for us to conclude on such beliefs even if the root cause and obvious truth is easy to examine.

Therefore the analysis of the effect of why economic recessions influence women's desire for beauty products, the lipstick effect will play a role in new norm and thus women's spending on beauty products may be the third indicator of economic recession - a sign that may be rooted in our ancestral psychology.

In the end, I have to admit that very similar lipstick effect can be observed with man, but it's more seen as a trade-off behaviour towards building status of dominant position and satisfying partially unlogical desires. It definitely requires more studies and research.