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Fashion and Finance
ELTON G. McGOUN
Underlying all finance research is the modernist metaphor of the financial services industry as a process in
which one set of claims is transformed into a more valuable one. There are other, post-modernist metaphors
that reflect that a lot of “consumption” is mixed in with the so-called “investment.” One of these is fashion.
Couture and investment depend on managed change for their success. Both are industries in which change is
desirable and where it is possible to profit from anticipating and/or effecting appropriate amounts of it. The
reason fashion is an especially telling metaphor for investment, however, is that, although the couture and
investment industries are both interested in profit, profit is not the main motivation for either. Especially at its
high end, haute couture, fashion is about the creation or re-creation of a self-image of power and sex. And at
its high end, professional investment, so is finance.
I. INTRODUCTION
The deficiencies of current economic theory in general and the so-called “modern finance”
theory in particular have been extensively documented; however, both not only survive but
also thrive - at least in their domination of conferences and journals. One important reason
is that the paradigm is especially well-suited to the preservation of the academic social structure,
and there is no professional incentive to expend the effort to create an alternative. Yet
one would have to be determinedly cynical to regard this as the only reason - surely the academic
finance profession is not so devoid of intellectual curiosity as to ignore the possibility
of genuinely new avenues of research?
But if we are restricted to one way of thinking, which for lack of a better term can be called
“modernist,” there can certainly be no serious challenge to the aptly named “modem finance”
theory. Although the natural successor term “post-modem finance” theory is definitely
trendy, but at best confusing and quite possibly a misnomer, it does assert that an alternative
to “modem finance” theory requires a departure from the modernist tradition which has
become so commonplace in finance as to go unnoticed. This paper is concerned with the distinction
between consumption and investment, which may or may not be recognized as one
of the cornerstones of finance. This artificial distinction is a revealing exemplar of how modernist
thinking has limited finance and how post-modernist thinking might free it.
A fundamental challenge to the status quo, however, requires exposing and reevaluating
the underpinnings of modem finance theory; therefore, the early parts of this paper concern
arcane matters that have long ceased to be of academic interest. Yet it is their disappearance
Elton G. McGoun - Associate Professor of Finance, Bucknell University, Lewisburg, Pennsylvania 17837 USA.
Fax: (717) 524.1338; E-Mail: mcgoun@bucknell.edu.
International Review of Financial Analysis, Vol. 5, No. 1,1996, pp. 65-78 ISSN: 1057-5219
Coptyright 0 1995 by JAI PRESS Inc., All Rights of reproduction in any form reserved.
66 INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS /Vol. 5(l)
from debate that has led to the atrophy of the discipline. Sections II and III consider “consumption”
and “investment” as mathematical and verbal expressions and discuss their modernist
implications. Section IV offers a post-modernist view of this artificial dichotomy.
Section V suggests fashion as a new metaphor for finance, and section VI outlines how this
new metaphor might affect finance theory. Section VII concludes with comments on the shift
from modernist to post-modernist thinking.
II. Y=C+I
The title of this section is an important macroeconomic identity.’ According to this identity,
the output (Y) of a simple economy must equal the sum of consumption (C) and investment
(I). But before attaching any specific meanings to the terms “output,” “consumption,” and
“investment,” let us stop to see what this modernist identity tells us about them.
Consider its mechanical implications. We can assemble “Y” from its components - put
together (add) “C” and “I” and get “Y.” With a simple logical transformation invited by the
mathematical form of the identity, we can also disassemble ‘7”’ into its components - take
away (subtract) either “C” or “I” from ‘7”’ and get the other. Now, one might argue that the
identity does not tell us that “Y” is really something that can be assembled from and disassembled
into “C” and “I”; it merely gives us a useful way to think about “Y.” This is disingenuous.
In the modernist tradition, it is customary to equate truth and reality - what is true
is real and vice versa.* As an identity is necessarily true, it makes a statement about things
that are necessarily real. While we may claim that “Y, ” “C,” and “I” are no more than convenient
abstractions, the identity has reified them - they are “real things.”
Thus, the identity tells us that one real thing (“Y”) is composed of (and can be decomposed
into) two other real things (“C” and “I”). However, the sign “+” does not just mean “and” in
the sense of putting two things together, it also means “addition” in the sense of putting two
quantities of things together. Using the letters “Y,” “ C,” and “I” in the expression instead of
the words “output,” “consumption,” and “investment” suggests the latter meaning. According
to this meaning, “Y,” “C,” and “I” are still things, but different types of things; that is, classes
of things. To be more accurate, the identity tells us that one class of real thing (“Y”) is composed
of (and can be decomposed into) two other classes of real things (“C” and “I”). This
complicates matters and poses the Platonic question: Are classes of things as real as things
themselves? Still, within the modernist tradition, the answer will be yes. Regardless of
whether it concerns classes of things or things themselves, an identity’s truth implies the reality
of what the identity concerns.
Furthermore, the identity implies that if “C” and “I” are classes of things, those classes
must be exhaustive. Everything that is “Y” must be either “C” or “I” or else the identity
would have other terms. The classes must also be mutually exclusive. Nothing that is “Y” can
be both “c” and ‘I” or else “Y” would be overstated. Finally, “C” and “I” must also be measurable.
It must be possible to count the things in the classes in order to make the mathematics
work. We can therefore always represent “Y” on a rectilinear grid whose axes are “C” and
“I.” Given “C” and “I,” we can locate “Y,” and given “Y,” we can locate allowable combinations
of “C” and “I.” Quantifiable classification of physical and social phenomena is characteristic
of the modernist tradition, and the Cartesian coordinate system is its apotheosis.
So far, we have said nothing specific about output, consumption, or investment, yet the
identity Y=C+I has told us quite a bit about them. We know that there really are such quantiFashion
and Finance 67
fiable things as output, consumption, and investment. We know that there are different countable
things that can be classified as output and as either consumption or investment but not
both. We know that we can represent output, consumption, and investment on a graph. We
know that the identity is characteristic of an economy that is in some sense a sort of machine
that can be assembled and disassembled.
But we “know” these things only if we “know” the identity Y=C+I. Its simple structure
notwithstanding, this identity is not a necessary truth. Rather, it is a modernist expression of
modernist beliefs regarding the structure of the world in general and economies in particular.
The terms “consumption” and “investment” were not chosen at random to describe two components
of “output.” They obviously had preexisting - and telling - meanings.
III. “CONSUMI”I’ION” OR “INVESTMENT”
“Output” implies “input” and a process transforming “input” into “output.” There has to be
something (a process) into which something (the input) goes and out of which something (the
output) comes. Not only machines transform input into output, but the terms strongly suggest
a mechanical (or at least industrial) metaphor for the economy, as does the identity Y=C+I.3
From our experience with machines and industrial processes, we know that in one sense input
must exceed output, as all processes produce waste. Yet, in another sense, output must exceed
input or we would not operate the machine or the process. Likewise, economic activity must
create something by which output exceeds input, and we call this something “value.” Throughout
the history of their discipline, economists have struggled with the notion of “value.” No one
knows what it is, but it must exist. Without value, there would be no rationale for economic
activity. Value is the thing of which output, consumption, and investment are classes.
Obviously, value is something desirable, as economic activity occurs in order to create it,
and we benefit from value in the process of extinguishing it. There are two things we can do
with the value that we receive as output - extinguish it for benefit now or put it back into
further economic activity for greater future benefit. We call the first choice “consumption”
and the second choice “investment.” Thus we have the identity Y=C+I. All value that is output
must be value that is consumed or value that is invested.
The choice of what to do with output is not neutral. The meanings of the words clearly
show that consumption is evil and investment is good. The Oxford English Dictionary (1989)
has nine definitions of “consumption,” eight of which use more or less negative language:
1) The action or fact of consuming or destroying; destruction; 2) The dissipation of moisture by evaporation;
3) Decay, wasting away, or wearing out; waste: 4) Wasting of the body by disease; a wasting disease; 5)
Wasteful expenditure; waste; 6) The using up of material, the use of anything as food, or for the support of
any process; 7) The destructive employment or utilization of the products of industry; the amount of industrial
products consumed: 8) Exhaustion of a right of action; 9) The test of a motor vehicle with regard to its
economical consumption of petrol.
The earliest appearance of “consumption” (in 1398) carried the fourth meaning: “Whan
blode is made thynne . . . soo folowyth consumpcyon and wastyng” (ibid.). Should we be
guilty that only through an act so undesirable (and even disgusting) as “consumption” can we
benefit from value?4
“Investment” is quite different. Its definitions refer to the verb “invest,” which has nine
definitions in The Oxford English Dictionary (1989), all of which refer to something neutral
68 INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS /Vol. 5(l)
or desirable:
1) To clothe, robe, or envelop (a person) in or with a garment or article of clothing; to dress or adorn; 2) To
cover or surround as with a garment: 3) To clothe or endue with attributes, qualities, or a character: 4) To
clothe with or in the insignia or an office; hence, with the dignity itself; to install in an office or rank with the
customary rites or ceremonies; 5) To establish (a person) in the possession of any office, position, property,
etc.; to endow or furnish with power, authority, or privilege; 6) To settle, secure, or vest (a right or power) in
(a person); 7) To enclose or hem in with a hostile force so as to shut off approach or escape; to lay siege to; to
besiege, beleaguer; to attack; 8) To occupy or engage, to absorb; 9) To employ (money) in the purchase of
anything from which interest or profit is expected; now especially in the purchase or property, stocks, shares,
etc., in order to hold these for the sake of the interest, dividends, or profits accruing from them.
Here, the earliest use of “investment” (in 1583) by Stubbes carried the first meaning:
“He.. . could haue inuested them in silks, veluets [etc.]” (ibid.). Is denying ourselves the benefit
of value in order to “invest” something of which we should be proud and for which we
should be honored?
Conflict between good and evil is a common theme in mythology; therefore, it is not a
coincidence that we have chosen only two alternatives for output and that one is good and
one is evil.5 While we claim that economic theory in general and finance theory in particular
represent things as they really are, they do not. Rather, they represent things in accordance
with our modernist metaphors (mechanical and industrial) and even our pre-modernist myths
(of good versus evil).6 Indeed, the notion of “things as they really are” is itself modernist
thinking. A distinguishing characteristic of post-modem thinking is that there is no such
thing; rather, all we ever have are our beliefs, our metaphors, and our myths. If we were to
choose different beliefs, metaphors, and myths, economic theory and finance theory would
look quite different, but be no less meaningful.
So far, this paper has focused on the identity Y=C+I because the drastic (and markedly
value-laden) disjunction between consumption and investment it embodies is a cornerstone of
“modem finance” theory. “Consumption” is a difficult concept that poses a serious problem for
economic and finance theory. In consumption, we extinguish value for our benefit. As we cannot
measure this benefit, we cannot measure the efficiency or effectiveness of consumption -
qualities that are very important in the modernist tradition. But “investment” is a simpler concept.
In investment, we temporarily extinguish value now for greater value in the future. As we
believe that we can measure the value of something (as its price in exchange), we believe that
we can measure the efficiency and effectiveness of investment. If it were not possible to separate
investment from consumption, finance theory would not be so straightforward. At least,
it would be harder to observe the cherished modernist tradition of keeping score.’
IV. “CONSUMPTION”AND “INVESTMENT”
When does consumption occur? From an economic standpoint, it occurs when value is committed
to being extinguished. This is consistent with the marketing standpoint, where the traditional
concern has been the decision to consume, although there is a slight difference
between the two in that the decision to consume is the psychological commitment (to purchase
a certain bottle of wine, for example) and consumption is the contractual commitment
(by paying for it). More recent research in marketing, however, has expanded its horizons
(Holbrook, 1995). In one direction, marketing has begun to study what occurs as the value is
Fashion and Finance 69
being extinguished; that is, the experience of drinking the wine.* In marketing, this view has
obvious implications for future purchasing decisions, but in economics, it is irrelevant - de
gustibus non disputandum est.
In another direction, marketing has begun to take a closer look at the pleasure inherent in
the purchasing decision itself. An important part of the experience of drinking wine is choosing
it. This phenomenon poses a problem for economics. Its traditional view has been that
shopping is an investment. One puts value into the search in order to get more value out of
the purchase. That shopping is among the most passionate pastimes in the United States (Einhorn,
1995) suggests that this is too simplistic. We are hardly a nation of such seriously rational
consumers. Oenophiles, for example, do not “invest” so much in education, travel, and
literature in order that their next glass of wine taste better. If shopping is not far more consumption
than investment, the two are certainly indistinguishably conjoined.
What is most interesting from an economic standpoint about the new directions in marketing
is that “output” can be “consumed” over and over. Although there is value extinguished
in shopping - the value of the time committed to it - time is not the output of a process.
Only time is required for the flaneur to stroll the aisles of a mall gazing at the displays (Kroker,
et al., 1989)9, and doing so not only does not limit, but may also even enhance, the same
experience for others. The mall and its displays themselves are output, but are not extinguished
as shoppers benefit from them. lo Not all the economically interesting activities in
our culture, and quite possibly fewer and fewer of them as we consume more experiences
than things, fit neatly into the modernist identity (Y&+1).
Finance approaches investment as simplistically as economics has approached consumption.
The traditional view has been that one puts value into the search for investments only in
order to get more value out of them. After the 1929 stock market crash, the extensive debate
over investment and speculation implicitly concerned this view. Speculators in large numbers
were not in the market for the “right” reasons. Their “evil” irrationality and impatience contrasted
with the “good” rationality and patience of investors. (Here is still another allusion to
the mythological conflict between good and evil.) Refusing to acknowledge that investment
and speculation (consumption) were intrinsically conjoined in the market, speculators/consumers
were either written out of “investment” altogether (dismissed as aberrations - compulsive
gamblers/shoppers) or pressed into conformance with preconceived notion of
“investment” (rehabilitated as essential sources of market liquidity).
It is astonishing that anyone can look at the huge financial services industry we have today
and not conclude that much, if not most, of the expenditure has nothing to do with the traditional
alibis for it - bringing together those having money and those needing it (for primary
securities markets), providing liquidity (for secondary securities markets), transferring risk
from those having too much of it to those willing to bear it (for contingent securities markets),
and exchanging purchasing power (for currencies markets).’ l The modernist metaphor
of this industry as a process in which one set of claims is transformed into a more valuable
one is not the only one under which we ought to be working. There are other, post-modernist
metaphors that reflect that a lot of “consumption ” is mixed in with the so-called “investment.”
One of these is fashion.
V. HAUTE FINANCE
“Fashion” has made a couple of appearances in finance. For years, there have been literal ref70
INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS / Vol. 5(l)
erences to a link between hemlines and economic performance (Shapiro, 1994). More
recently, we are seeing metaphorical references concerning investors who tend to follow
common patterns or styles of investment. 1 2 The fashion metaphor is pregnant with possibilities
that have largely been left unexplored; “fashion” is merely used as a synonym for the
pejoratives “fad” and “herd behavior”13 - a phenomenon noted by Keynes in his General
Theory (1936). Papers on investment “fashion” commonly attempt to develop rational (good)
explanations for this socially inefficient (evil) behavior - academic oenophiles pouring old
mythological wine into new methodological bottles. (Scharfstein & Stein, 1990; Banerjee,
1992; Greenblatt et al., 1995). But “fashion” in terms of clothing styles has been receiving
greater academic attention from a post-modernist perspective (Faurschou, 1987; Wilson,
1993), and “fashion” can be a far more useful metaphor for finance than it has been.
There are “fashions” in many things other than clothing - television (Jones, 1992) cuisine
(Levenstein, 1988; 1993), academic research, l4 etc. The essence of fashion - what distinguishes
it from style - is change (Davis, 1992); therefore, one is likely to find fashion wherever
one finds change,15 regardless of whether the attitude toward change is largely positive
(television), mixed (cuisine), or negative (academic research). There are, however, a number
of similarities between designing clothing and making investments that suggest a deeper significance
of the term “fashion” for finance.
First, successful couture is an unconventional design that eventually becomes conventional.
“The real aim of a fashionable purchase is not uniqueness but the appearance of
belonging to a company of leaders” (Fraser, 198 1, p. 12). Popularity must not occur too soon
to profit from the original design but soon enough that the original design be recognized as
the precedent.16 When a design becomes popular, it is no longer fashionable. Likewise, successful
investment must be fashion-anticipating. The only way to make money is to take an
unconventional position which later becomes conventional - you believe that the market
price ought to change, act upon your belief before it does, and profit when the change occurs.
When an investment becomes popular it is no longer profitable.17
Second, successful couture cannot transcend the boundaries of what is considered acceptable.
Likewise, successful investment must be fashion-conscious in that an institutional
investor’s style must not be so unusual as to cause concern in the event of insufficient profit.
Third, successful couturiers become prominent couturiers who at times can influence the
direction fashion will take and perhaps even expand the boundaries of what is considered
acceptable. Likewise, successful investors can be fashion-setting, with their activities moving
markets in their desired directions.18
Fourth, fashion is sometimes thought to be motivated by consumer boredom or perhaps
driven by capitalist exploitation of consumer ignorance and weakness (Davis, 1992). There
are, however, too many examples of rejected fashions - poufs, midis, and mini-revivals in
skirts alone (Fraser, 1981) - to conclude consumer helplessness. And “The existence of
street fashion demonstrates that a desire to adorn one’s body is not simply the result of being
duped by the fashion industry and capitalism” (Wilson, 1991, p. 25 quoted in Steel, 1996, p.
166). Likewise, prices can be moved by the noise trading of bored traders and/or by brokers
churning their customers’ accounts for their own profits, although again there is ample evidence
that most individual investors are actively interested in the contents of their portfolios.
The source of these four sociological similarities is that couture and investment depend on
managed change for their success. Both are industries in which change is desirable and where
it is possible to profit from anticipating and/or effecting appropriate amounts of it. (And both
the couture and investment industries are reported by symbiotic journalists who sustain the
illusion that activity and change are occurring when nothing at all is happening.) But change
Fashion and Finance 71
is also true of television and to a lesser extent cuisine (although not of academic research).
The reason fashion is an especially telling metaphor for investment is that, although couture
and investment industries are both interested in profit, but profit is not the main motivation
for either. At least for professionals, and for many amateurs as well, both dressing and investing
are done for non-financial reasons.
Key questions regarding couture are: “For whom does the fashionable woman19 dress -
herself or others? - and in what measure are her dress choices her own, and to what degree
are they shaped by advertising and business?’ (Benstock and Ferriss, 1994, p. 4). These same
questions ought to be asked of investors as well, but they never are. Traditional financial
research unequivocally asserts that investment decisions are made by the investor for the
investor. But investment decisions are not made in a social vacuum any more than are the
decisions to purchase and wear certain articles of clothing. To fully understand investment, it
is essential to consider the importance of the appearance of an investor’s decisions to others
and the importance of the investment decisions of others to an investor and to do so not under
some artificial, mathematically tractable set of assumptions, but in a real society.
Why is clothing worn? Certainly, it is worn for more than modesty and protection from the
environment. Whether we consider ourselves fashionable, anti-fashionable, un-fashionable,
or a-fashionable,*0 our clothing is an important sign of our identity. “Clothing draws the
body so that it can be culturally seen, and articulates it as a meaningful form” (Lemoine-Luccioni,
1983, p. 147 quoted in Silverman, 1986, p. 145). Clothing also plays an important role
in our social relations. “The acts of shopping, of wearing an article of clothing, of receiving
clothing as a gift, can be expressions of recognition and love between women, or between
women and men” (Sawchuck, 1987, p. 69). Furthermore, “Dress is a form of visual art, a creation
of images with the visible self as its medium. The most important aspect of clothing is
the way it looks; all other considerations are occasional and conditional” (Hollander, 1978, p.
311). In short, clothing is an elaborate semiotic system conveying complex social and cultural
messages (Lurie, 1981; Kaiser, 1990).
Especially at its high end, haute couture, fashion is about the creation or re-creation of a
self-image of power and sex. And at its high end, professional investment, so is finance,21
which is about more than return, but not as we might expect. Power and sex come from the
investment of money, not its consumption; it is not money that matters, but where it comes
from. Whose money has greater power, that of a lottery winner or a bond trader? Whose
money has greater sex appeal, that of a dissolute heir or heiress or an international currency
trader? Who becomes a “master of the universe” (Wolfe, 1988) or a “big swinging thingy?”
(Lewis, 1989). Financial markets offer their participants far more money than can ever be
consumed. There is no way to spend it all - one can even run for president of the United
States and never have to worry where the next Lamborghini and Parisian pied-a-terre will
come from. Making money (or even simply moving it around) can “buy” the power and sex
that money itself can’t.**
Few of us wear haute couture and few of us trade bonds or currencies, but we can still
involve ourselves in a small way. While a Versace gown or Armani suit may be too expensive,
a Chanel scarf or a Donna Karan tie are not. *3 While purchasing a block of Netscape or
Televisa may be beyond our budget or our expertise, we can manage to put a few dollars into
the Fidelity Technology Fund or the Templeton Latin America Fund. Just as more and more
couturiers have been licensing their names to accessories and related products, more and
more mutual funds are being created. These mutual funds are labeled like designer jeans -
creating the invidious impression that Dreyfus and Evergreen California municipal bond
funds differ, when they are likely to be as different as Calvin Klein and Bill Bias@ - and
72 INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS / Vol. 5(l)
marketed in a similar way.
We can dream even more inexpensively. Anyone can browse at Bloomingdales or through
a fashion magazine. For bus fare or the cover price, we can consume images of Westwood or
Gaultier creations - clothing that most would never dare to wear. Anyone can roam through
the third section of The Wall Street Journal for the price of the newspaper (or for waiting
until the subscriber has read it). In this grand financial department store, the world’s most luscious
commodities (ECU bonds, Nikkei futures, etc.) are on display for us. Though intimidated
by their apparent complexity and sophistication, we can still imagine owning them;
imagine trading them. The WSJ is a Victoria’s Secret catalog for S&P Midcap Index Option
fetishists. With Elle, Harper’s Bazaar, and Mirabella all costing more, it’s the most sophisticated,
erotic experience you can have for under a dollar.25
VI. FINANCE AND FASHION THEORY
That couture is undoubtedly a provocative metaphor for finance means more than the opportunity
to concoct clever analogies. The academic theories and models that have been created
to understand fashion can provide insights into finance. Sproles (1985) provides a concise
summary of behavioral science theories of fashion that can be used to suggest what might be
done for finance. He breaks these down into sociological models, communication models,
psychological models, economic models, cultural models, geographic models, historical
models, aesthetic models, and business-marketing models. Some of these are common in academic
finance, some have been considered, some have possibilities, and some are probably
irrelevant.
The basis for applying behavioral science theories to finance was discussed in Section IV
- that much of what we call “investment” is in fact “consumption.” To paraphrase Sproles
(1985), “[Financial markets are] dynamic mechanisms of change through which a potential
[investment instrument] is transmitted from its point of creation to public introduction, discernible
public acceptance, and eventual obsolescence.” (p. 56) He breaks this process into
six stages:
1. Invention and introduction. A source of fashion objects, such as a fashion designer,
entrepreneur, or consumer innovator, creates an object that is noticeably different
from its predecessors.
2. Fashion leadership. A small proportion of the most fashion-conscious consumers
adopt and introduce the fashion to the public.
3. Increasing social visibility. The fashion receives increasing endorsement among
other fashion-conscious consumers, thus becoming more visible among a wider
range of social groups and life-styles.
4. Conformity within and across social groups. The fashion achieves social legitimacy,
and the compelling forces of conformity, communications, and mass marketing
propagate widespread adoption of the fashion.
5. Social saturation. The fashion becomes a daily occurrence in the lives of many, and
in fact becomes overused, thus setting the stage for its decline.
6. Decline and obsolescence. New fashions are introduced as replacements of the
socially saturated fashion, and use of the old fashion recedes (Sproles, 1985, p. 56).
Fashion and Finance 73
Turning to the explanatory models and theories themselves, the sociological models
include the trickle-down theory (that fashions move downward through different classes) and
the collective behavior model (that fashions are mass movements). In finance, the former is
implicit in statements to the effect that “when clerks start passing on stock tips, it’s time to
exit the market,” and the latter in the references to “fads” and “herd behavior” noted in Section
V. The problem with finance is that trickle-down phenomena and collective behavior are
regarded as aberrations and not as fundamental processes that drive investment.
Communication models include the adoption and diffusion model, which concerns how
fashion is communicated, and the symbolic communication model, which concerns the semiotics
of fashion. While finance does concern itself with information and frequently builds
models incorporating “sophisticated’ and “naive” investors who are “insiders” and “outsiders”
in terms of access to information regarding investments, it never considers how “sophisticated”
investors as a social group are recognized by each other and by “naive” investors and
the aspirations “naive” investors might have to become “sophisticated” investors in order to
reap the benefits of “sophistication.” One would have to be a “naive” observer not to imagine
that these social processes have a profound effect on investors and that the social structure of
the investment community consists of many more than two levels.
Individual-centered models, conformity-centered models, and the uniqueness motivation
model all fall under the heading of psychological models. While the psychology of markets is
a recognized, but almost wholly neglected, subject in finance, these psychological models are
different. They concern why people invest, not just how they respond in markets to the
behavior of other investors. To finance academics, private investors are concerned only with
making an appropriate trade-off between risk and return. Professional investors are apparently
no different from those who choose other professions. In casual conversations, professional
investors are quick to acknowledge that their profession appeals to a certain
personality type. If so, both medicine and markets would be quite different, for example, if
physicians and professional investors were to trade places. (Of course, this swap would entail
the requisite training, which is far more important in medicine than markets.) If we believe
that Wall Street would be much different if staffed wholly by people that are now physicians,
social workers, teachers, or artists (of course, there is already a smattering of these people
there, but probably those who didn’t feel comfortable doing what they were doing), then we
must conclude that what markets are is a consequence of the psychology of the people who
make up those markets.
It would seem that the so-called “economic models” - the demand model, the scarcityrarity
model, and the conspicuous consumption model - would already be used by
finance. They are not. Only on rare occasions are individual securities thought of as commodities
having their own markets and their own supply and demand. Usually, individual
securities are treated as nothing more than risk-return bundles that can be perfectly duplicated
with appropriate combinations of other securities. Investors, however, are not indifferent
between Consolidated Edison and Consolidated Freight or between Continental Can
and Continental Airlines. The industries matter and the companies matter; consequently,
finance ought to be employing the same economic models that we apply to other consumer
goods.
Cultural models (subcultural leadership model, social conflict model, and cultural production
systems model), geographic models (spatial diffusion model), and aesthetic models (art
movement model, ideals of beauty model, and aesthetic perception and learning model) seem
to have limited relevance to finance itself, although aesthetic models might be of interest in
considering the meta-discipline of finance methodology as a form of art (Szostak, 1992), and
74 INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS /Vol. 5(l)
it is possible that other interesting applications might present themselves once the sociology
of inves~ent is seriously examined. 26 Historical models (historical resurrection model and
historical continuity model) have greater potential. Recently, old investment strategies have
been revived, repackaged, and remarketed (Kairys, 1992; Haugen, 1993, and a broader
understanding of this phenomenon is clearly called for.
Finally, not unexpectedly, business marketing models (mass-market model and market
infrastructure model) can be useful. The advertisements in Vogue are certainly influential in
fashion. The advertisements for investment companies and securities in The Wall Street Journal
and on television ought to be as well, or large sums of money are being wasted. And as
mentioned in Section V, there is quite an extensive financial press that must be influential in
the markets. Studies have indeed examined journalistic impacts on prices, but much more can
be done than the usual event studies (Huberman & Kandel, 1990; Desai & Jain, 1995).
Thus, the fashion metaphor does suggest numerous new ways in which to undertake
finance research and to understand financial activity. But the sine qua nun of accepting the
metaphor and adopting new ways is transcending the traditional, limited view of investment
as a pure, unadulterated, rational, “good” activity.
VII. CONCLUSION
There certainly is “investment,” but much if not most of what goes on under that label is
“consumption.” We consume “investment” as we consume “fashionable clothing” or “burgers
and fries.” How could it be otherwise? It isn’t possible for the financial services industry
to be free of the cultural considerations that we readily acknowledge shape the consumer
goods industry. It isn’t possible for the flamboyant traders who watch the Super Bowl from
private boxes and dine with supermodels in Milan to turn suddenly sober when it comes time
to push the button sending 15 billion yen halfway around the world. What difference does it
make what our return is, as long as we were in on Boston Chicken or Blue Star Airlines, as
long as we trade stocks for Gordon Getty or Gordon Gekko, as long as we date Darryl Hannah
or Darien Taylor? On Wall Street or in Wall Street, we’re players.*’
A post-modem theory of finance acknowledges this. We must go beyond the mechanical
metaphors, the myths of good and evil, and the reverence for questionably me~ingful quantification
that characterize the modernist tradition within which we now do research. That
finance is a part of popular culture does not diminish it in any way; it simply means that we
understand it differently. There is, however, a danger in pulling back the curtain to reveal the
real Wizard of Oz. We’ve conned some into believing that we have essential investment
expertise when we are just extinguishing a little of their value in our own consumption.
Sometimes, we’ve even conned ourselves into believing that we are engaged in the valuable
social function of allocating capital to its most efficient uses rather than churning it for our
own amusement. Exposing the con might mean that more than a few “players” will find
themselves back in Kansas.
NOTES
1. An identity is a statement, the truth of which is a necessary consequence of the meanings
of its terms.
Fashion and Finance 75
2. While we can easily come up with examples in which truth and reality are not equal,
our first impression is usually that they are, and we have to convince ourselves otherwise.
3. According to The Oxford English Dictionary (1989), the most general definition of
“output” is “The act or fact of putting or turning out; production; the quantity or amount produced;
the product of any industry or exertion, viewed quantitatively; the result given to the
world. (Originally a technical or local term of iron-works, coal-mines, etc.; appearing not in
general dictionaries till after 1880.)” Its earliest use as a noun was by Simmonds in the Dictionary
of Trade, defined as “a term in the iron trade for the make of metal or annual quantity
made” (OED, 1989).
4. Although Epicureans might regard consumption as “good” and “investment” as evil,
this is not a common philosophy.
5. Although some (the aforementioned Epicureans) might reverse the labels, there is still
one “good” and one “evil” choice.
6. The myth of good versus evil also appears within investment in the risk-return tradeoff.
As in a legendary quest, in order to achieve the greatest good (highest return), one must
confront the most dangerous evil (highest risk). Although no one can say what risk is, this
modernist trade-off reifies it and demands that it be measured.
7. Employees in the financial services industry often remark that they like being evaluated
by one number - their return. Such simplicity is itself a myth.
8. This new direction is more consistent with the non-economic meanings of “consumption.”
9. In the following quotation, “shopping” presumes an intention to purchase. The word
need not carry that connotation.
Shopping malls call forth the same psychological position as TV watching; voyeurism. Except this time, they
do it one better. Rather than flicking the dial, you take a walk from channel to channel as the neon stores flick
by.. Shopping malls are the real postmodem sites of happy consciousness.. [It is] not shopping at all and
certainly not the will to possession, but the whimsical act of looking at objects as being seductive-the pleasure
of the gaze as it plays fictionally with the possibility of possession, takes on and discards whole identities
associated with objects, and then moves on. (Kroker et al., 1989, pp. 208.209).
10. “But there are still times when women, men, and families can and will go to department
stores - not just because they need to buy but in search of stimulation and entertainment,
as if they were off to the movies. The department stores that will survive into the future
seem likely to be not necessarily those with the biggest or best choice of goods but those with
the most ingenious displays, the most dramatic decor, and a way of convincing shoppers that
they are places to see and be seen. Although department stores must continue to make sales,
that activity appears to be subsidiary to their broader social function as a form of theatre, with
the customers as the cast.. . Through such settings, people wander - scrutinizing each other
as they float up and down on escalators, and catching sight of their image in miles of reflecting
glass and chrome, in stores that are the mirror of our time.” (Fraser, 198 1, p. 263)
Il. Consider the following thought experiment. Finance textbooks recommend that corporations
solicit all project proposals from within the corporation and undertake those having
positive net present value. If this is a sound recommendation, then the most efficient allocation
of capital within an economy would be to solicit all project proposals from within the
economy and undertake those having the highest net present value up to the amount of capital
available. Note that this is not socialism, but a logical extension of capitalism - all capital is
privately owned and the allocation of capital occurs on a perfectly competitive basis. Choos76
INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS /Vol. 5(l)
ing the highest net present value projects from a list (admittedly, a very long list) is a simple
task. If the corporate finance literature is correct, we must conclude that the vast financial services
industry is expensive and unnecessary overhead.
12. A related metaphor, “window dressing,” describes the practice of buying and selling
securities to enhance the appearance of a portfolio (Lakonishok, et al., 1991).
13. As in Bikhchandani et al. (1992).
14. Certainly, Kuhn’s (1970) “paradigms” are research fashions. Finance definately has
its fashions in methods (ex. ARCH to GARCH to EGARCH) and metaphors (ex. market for
corporate control, signaling, etc.)
15. Of course, not all change is necessarily associated with fashion. For example, one
would be hard-pressed to attribute market price changes, without which no investment would
be profitable, solely to fashion, although some price changes certainly are.
16. The legendary designer Gabrielle Chanel remarked that fashion is made to become
unfashionable (Davis, 1992).
17. When applied to couture, the adjective “successful” means financially successful. It
is possible for a couturier to be critically or artistically successful without being profitable.
This clarification is not necessary for investment - if there are other forms of success (social
or political, for example), they come from financial success.
18. Few investors or couturiers may actually have that much power; rather, it may be
more a matter of successful investors and couturiers having a knack for anticipating the
desires of the market. “The truly successful designer has an instinct for visualizing sharply
what is perhaps nebulously and unconsciously desired” (Hollander, 1978, p. 351). “Fashion
designers are themselves aware that their success and their economic survival depend on their
discerning and anticipating the image that their customers have of themselves” (Fraser, 198 1,
p. 168). These quotations bear a marked similarity to Keynes’ (1936) famous quotation likening
financial markets to beauty contests.
19. Although fashion today is important to both men (Chenoune, 1993) and women, it is
more a concern of women and more a feminist issue. In the fifteenth, sixteenth, and seventeenth
centuries, however, fashion was a class issue, not a gender issue, and male attire was
often the richer and more elegant. (Silverman, 1986)
20. “[Fashions] are often deliberately resisted - by people who despise fashion as a
vessel of conformity, of copying other people’s habits, particularly if it involves changing
their own. They tend to forget that their own way of dressing conforms to obsolete fashions,
perhaps revolutionary in their day, that have come to have the flavor for them of inviolable
personal laws” (Hollander, 1978, p. 360).
21. “Power dressing” (including the notorious “power tie”) was a fashion trend of the
1980’s (Steele, 1996) just as “power lunching” was a business trend.
22. “The first phase of the domination of the economy over social life brought into the
definition of all human realization the obvious degradation of being into having. The present
phase of total occupation of social life by the accumulated results of the economy leads to a
generalized sliding of having into appearing” (Debord, 1983, paragraph 17).
23. “Purchasers would get the feeling that they were acquiring not mere things, like
sheets or blue jeans, but a little piece of the person whose signature those things bore - a
few essential drops of that person’s life, looks, wealth, success, and fame” (Fraser, 1981, p.
259).
24. “Everyone, without exception, whom I interviewed and spoke with in the course of
my research on fashion interpreted designer jeans in this light [as a prominent status marker].
Most felt that status distinctions were the only reason for designer jeans because, except for
Fashion and Finance 77
the display of the designer label, they could detect no significant difference between designer
and nondesigner jeans” (Davis, 1992, p. 76).
25. In the film Wall Street, Charlie Sheen’s character commented “Making love to her
was like reading the Wall Street Journal.” It might have been a compliment.
26. Readers interested in more details on these and other models mentioned in this section
should consult Sproles (1985), which provides brief descriptions and selected references.
27. Besides, wherever we are on the return scale of the Cartesian graph, we can find a
risk scale that makes us look good.
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Keynes, J. M. (1936). The general theory of employment, interest, and money. London Macmillan.
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Press.
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Silverman, K. (1986). Fragments of a fashionable discourse. In Modleski, T., ed. Studies in
entertainment. Bloomington, IN: Indiana University Press.
Sproles, G. B. (1985). Behavioral science theories of fashion. In Solomon, M. R, ed. Thepsychology
offashion. Lexington, MA: Lexington Books.
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ELTON G. McGOUN
Underlying all finance research is the modernist metaphor of the financial services industry as a process in
which one set of claims is transformed into a more valuable one. There are other, post-modernist metaphors
that reflect that a lot of “consumption” is mixed in with the so-called “investment.” One of these is fashion.
Couture and investment depend on managed change for their success. Both are industries in which change is
desirable and where it is possible to profit from anticipating and/or effecting appropriate amounts of it. The
reason fashion is an especially telling metaphor for investment, however, is that, although the couture and
investment industries are both interested in profit, profit is not the main motivation for either. Especially at its
high end, haute couture, fashion is about the creation or re-creation of a self-image of power and sex. And at
its high end, professional investment, so is finance.
I. INTRODUCTION
The deficiencies of current economic theory in general and the so-called “modern finance”
theory in particular have been extensively documented; however, both not only survive but
also thrive - at least in their domination of conferences and journals. One important reason
is that the paradigm is especially well-suited to the preservation of the academic social structure,
and there is no professional incentive to expend the effort to create an alternative. Yet
one would have to be determinedly cynical to regard this as the only reason - surely the academic
finance profession is not so devoid of intellectual curiosity as to ignore the possibility
of genuinely new avenues of research?
But if we are restricted to one way of thinking, which for lack of a better term can be called
“modernist,” there can certainly be no serious challenge to the aptly named “modem finance”
theory. Although the natural successor term “post-modem finance” theory is definitely
trendy, but at best confusing and quite possibly a misnomer, it does assert that an alternative
to “modem finance” theory requires a departure from the modernist tradition which has
become so commonplace in finance as to go unnoticed. This paper is concerned with the distinction
between consumption and investment, which may or may not be recognized as one
of the cornerstones of finance. This artificial distinction is a revealing exemplar of how modernist
thinking has limited finance and how post-modernist thinking might free it.
A fundamental challenge to the status quo, however, requires exposing and reevaluating
the underpinnings of modem finance theory; therefore, the early parts of this paper concern
arcane matters that have long ceased to be of academic interest. Yet it is their disappearance
Elton G. McGoun - Associate Professor of Finance, Bucknell University, Lewisburg, Pennsylvania 17837 USA.
Fax: (717) 524.1338; E-Mail: mcgoun@bucknell.edu.
International Review of Financial Analysis, Vol. 5, No. 1,1996, pp. 65-78 ISSN: 1057-5219
Coptyright 0 1995 by JAI PRESS Inc., All Rights of reproduction in any form reserved.
66 INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS /Vol. 5(l)
from debate that has led to the atrophy of the discipline. Sections II and III consider “consumption”
and “investment” as mathematical and verbal expressions and discuss their modernist
implications. Section IV offers a post-modernist view of this artificial dichotomy.
Section V suggests fashion as a new metaphor for finance, and section VI outlines how this
new metaphor might affect finance theory. Section VII concludes with comments on the shift
from modernist to post-modernist thinking.
II. Y=C+I
The title of this section is an important macroeconomic identity.’ According to this identity,
the output (Y) of a simple economy must equal the sum of consumption (C) and investment
(I). But before attaching any specific meanings to the terms “output,” “consumption,” and
“investment,” let us stop to see what this modernist identity tells us about them.
Consider its mechanical implications. We can assemble “Y” from its components - put
together (add) “C” and “I” and get “Y.” With a simple logical transformation invited by the
mathematical form of the identity, we can also disassemble ‘7”’ into its components - take
away (subtract) either “C” or “I” from ‘7”’ and get the other. Now, one might argue that the
identity does not tell us that “Y” is really something that can be assembled from and disassembled
into “C” and “I”; it merely gives us a useful way to think about “Y.” This is disingenuous.
In the modernist tradition, it is customary to equate truth and reality - what is true
is real and vice versa.* As an identity is necessarily true, it makes a statement about things
that are necessarily real. While we may claim that “Y, ” “C,” and “I” are no more than convenient
abstractions, the identity has reified them - they are “real things.”
Thus, the identity tells us that one real thing (“Y”) is composed of (and can be decomposed
into) two other real things (“C” and “I”). However, the sign “+” does not just mean “and” in
the sense of putting two things together, it also means “addition” in the sense of putting two
quantities of things together. Using the letters “Y,” “ C,” and “I” in the expression instead of
the words “output,” “consumption,” and “investment” suggests the latter meaning. According
to this meaning, “Y,” “C,” and “I” are still things, but different types of things; that is, classes
of things. To be more accurate, the identity tells us that one class of real thing (“Y”) is composed
of (and can be decomposed into) two other classes of real things (“C” and “I”). This
complicates matters and poses the Platonic question: Are classes of things as real as things
themselves? Still, within the modernist tradition, the answer will be yes. Regardless of
whether it concerns classes of things or things themselves, an identity’s truth implies the reality
of what the identity concerns.
Furthermore, the identity implies that if “C” and “I” are classes of things, those classes
must be exhaustive. Everything that is “Y” must be either “C” or “I” or else the identity
would have other terms. The classes must also be mutually exclusive. Nothing that is “Y” can
be both “c” and ‘I” or else “Y” would be overstated. Finally, “C” and “I” must also be measurable.
It must be possible to count the things in the classes in order to make the mathematics
work. We can therefore always represent “Y” on a rectilinear grid whose axes are “C” and
“I.” Given “C” and “I,” we can locate “Y,” and given “Y,” we can locate allowable combinations
of “C” and “I.” Quantifiable classification of physical and social phenomena is characteristic
of the modernist tradition, and the Cartesian coordinate system is its apotheosis.
So far, we have said nothing specific about output, consumption, or investment, yet the
identity Y=C+I has told us quite a bit about them. We know that there really are such quantiFashion
and Finance 67
fiable things as output, consumption, and investment. We know that there are different countable
things that can be classified as output and as either consumption or investment but not
both. We know that we can represent output, consumption, and investment on a graph. We
know that the identity is characteristic of an economy that is in some sense a sort of machine
that can be assembled and disassembled.
But we “know” these things only if we “know” the identity Y=C+I. Its simple structure
notwithstanding, this identity is not a necessary truth. Rather, it is a modernist expression of
modernist beliefs regarding the structure of the world in general and economies in particular.
The terms “consumption” and “investment” were not chosen at random to describe two components
of “output.” They obviously had preexisting - and telling - meanings.
III. “CONSUMI”I’ION” OR “INVESTMENT”
“Output” implies “input” and a process transforming “input” into “output.” There has to be
something (a process) into which something (the input) goes and out of which something (the
output) comes. Not only machines transform input into output, but the terms strongly suggest
a mechanical (or at least industrial) metaphor for the economy, as does the identity Y=C+I.3
From our experience with machines and industrial processes, we know that in one sense input
must exceed output, as all processes produce waste. Yet, in another sense, output must exceed
input or we would not operate the machine or the process. Likewise, economic activity must
create something by which output exceeds input, and we call this something “value.” Throughout
the history of their discipline, economists have struggled with the notion of “value.” No one
knows what it is, but it must exist. Without value, there would be no rationale for economic
activity. Value is the thing of which output, consumption, and investment are classes.
Obviously, value is something desirable, as economic activity occurs in order to create it,
and we benefit from value in the process of extinguishing it. There are two things we can do
with the value that we receive as output - extinguish it for benefit now or put it back into
further economic activity for greater future benefit. We call the first choice “consumption”
and the second choice “investment.” Thus we have the identity Y=C+I. All value that is output
must be value that is consumed or value that is invested.
The choice of what to do with output is not neutral. The meanings of the words clearly
show that consumption is evil and investment is good. The Oxford English Dictionary (1989)
has nine definitions of “consumption,” eight of which use more or less negative language:
1) The action or fact of consuming or destroying; destruction; 2) The dissipation of moisture by evaporation;
3) Decay, wasting away, or wearing out; waste: 4) Wasting of the body by disease; a wasting disease; 5)
Wasteful expenditure; waste; 6) The using up of material, the use of anything as food, or for the support of
any process; 7) The destructive employment or utilization of the products of industry; the amount of industrial
products consumed: 8) Exhaustion of a right of action; 9) The test of a motor vehicle with regard to its
economical consumption of petrol.
The earliest appearance of “consumption” (in 1398) carried the fourth meaning: “Whan
blode is made thynne . . . soo folowyth consumpcyon and wastyng” (ibid.). Should we be
guilty that only through an act so undesirable (and even disgusting) as “consumption” can we
benefit from value?4
“Investment” is quite different. Its definitions refer to the verb “invest,” which has nine
definitions in The Oxford English Dictionary (1989), all of which refer to something neutral
68 INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS /Vol. 5(l)
or desirable:
1) To clothe, robe, or envelop (a person) in or with a garment or article of clothing; to dress or adorn; 2) To
cover or surround as with a garment: 3) To clothe or endue with attributes, qualities, or a character: 4) To
clothe with or in the insignia or an office; hence, with the dignity itself; to install in an office or rank with the
customary rites or ceremonies; 5) To establish (a person) in the possession of any office, position, property,
etc.; to endow or furnish with power, authority, or privilege; 6) To settle, secure, or vest (a right or power) in
(a person); 7) To enclose or hem in with a hostile force so as to shut off approach or escape; to lay siege to; to
besiege, beleaguer; to attack; 8) To occupy or engage, to absorb; 9) To employ (money) in the purchase of
anything from which interest or profit is expected; now especially in the purchase or property, stocks, shares,
etc., in order to hold these for the sake of the interest, dividends, or profits accruing from them.
Here, the earliest use of “investment” (in 1583) by Stubbes carried the first meaning:
“He.. . could haue inuested them in silks, veluets [etc.]” (ibid.). Is denying ourselves the benefit
of value in order to “invest” something of which we should be proud and for which we
should be honored?
Conflict between good and evil is a common theme in mythology; therefore, it is not a
coincidence that we have chosen only two alternatives for output and that one is good and
one is evil.5 While we claim that economic theory in general and finance theory in particular
represent things as they really are, they do not. Rather, they represent things in accordance
with our modernist metaphors (mechanical and industrial) and even our pre-modernist myths
(of good versus evil).6 Indeed, the notion of “things as they really are” is itself modernist
thinking. A distinguishing characteristic of post-modem thinking is that there is no such
thing; rather, all we ever have are our beliefs, our metaphors, and our myths. If we were to
choose different beliefs, metaphors, and myths, economic theory and finance theory would
look quite different, but be no less meaningful.
So far, this paper has focused on the identity Y=C+I because the drastic (and markedly
value-laden) disjunction between consumption and investment it embodies is a cornerstone of
“modem finance” theory. “Consumption” is a difficult concept that poses a serious problem for
economic and finance theory. In consumption, we extinguish value for our benefit. As we cannot
measure this benefit, we cannot measure the efficiency or effectiveness of consumption -
qualities that are very important in the modernist tradition. But “investment” is a simpler concept.
In investment, we temporarily extinguish value now for greater value in the future. As we
believe that we can measure the value of something (as its price in exchange), we believe that
we can measure the efficiency and effectiveness of investment. If it were not possible to separate
investment from consumption, finance theory would not be so straightforward. At least,
it would be harder to observe the cherished modernist tradition of keeping score.’
IV. “CONSUMPTION”AND “INVESTMENT”
When does consumption occur? From an economic standpoint, it occurs when value is committed
to being extinguished. This is consistent with the marketing standpoint, where the traditional
concern has been the decision to consume, although there is a slight difference
between the two in that the decision to consume is the psychological commitment (to purchase
a certain bottle of wine, for example) and consumption is the contractual commitment
(by paying for it). More recent research in marketing, however, has expanded its horizons
(Holbrook, 1995). In one direction, marketing has begun to study what occurs as the value is
Fashion and Finance 69
being extinguished; that is, the experience of drinking the wine.* In marketing, this view has
obvious implications for future purchasing decisions, but in economics, it is irrelevant - de
gustibus non disputandum est.
In another direction, marketing has begun to take a closer look at the pleasure inherent in
the purchasing decision itself. An important part of the experience of drinking wine is choosing
it. This phenomenon poses a problem for economics. Its traditional view has been that
shopping is an investment. One puts value into the search in order to get more value out of
the purchase. That shopping is among the most passionate pastimes in the United States (Einhorn,
1995) suggests that this is too simplistic. We are hardly a nation of such seriously rational
consumers. Oenophiles, for example, do not “invest” so much in education, travel, and
literature in order that their next glass of wine taste better. If shopping is not far more consumption
than investment, the two are certainly indistinguishably conjoined.
What is most interesting from an economic standpoint about the new directions in marketing
is that “output” can be “consumed” over and over. Although there is value extinguished
in shopping - the value of the time committed to it - time is not the output of a process.
Only time is required for the flaneur to stroll the aisles of a mall gazing at the displays (Kroker,
et al., 1989)9, and doing so not only does not limit, but may also even enhance, the same
experience for others. The mall and its displays themselves are output, but are not extinguished
as shoppers benefit from them. lo Not all the economically interesting activities in
our culture, and quite possibly fewer and fewer of them as we consume more experiences
than things, fit neatly into the modernist identity (Y&+1).
Finance approaches investment as simplistically as economics has approached consumption.
The traditional view has been that one puts value into the search for investments only in
order to get more value out of them. After the 1929 stock market crash, the extensive debate
over investment and speculation implicitly concerned this view. Speculators in large numbers
were not in the market for the “right” reasons. Their “evil” irrationality and impatience contrasted
with the “good” rationality and patience of investors. (Here is still another allusion to
the mythological conflict between good and evil.) Refusing to acknowledge that investment
and speculation (consumption) were intrinsically conjoined in the market, speculators/consumers
were either written out of “investment” altogether (dismissed as aberrations - compulsive
gamblers/shoppers) or pressed into conformance with preconceived notion of
“investment” (rehabilitated as essential sources of market liquidity).
It is astonishing that anyone can look at the huge financial services industry we have today
and not conclude that much, if not most, of the expenditure has nothing to do with the traditional
alibis for it - bringing together those having money and those needing it (for primary
securities markets), providing liquidity (for secondary securities markets), transferring risk
from those having too much of it to those willing to bear it (for contingent securities markets),
and exchanging purchasing power (for currencies markets).’ l The modernist metaphor
of this industry as a process in which one set of claims is transformed into a more valuable
one is not the only one under which we ought to be working. There are other, post-modernist
metaphors that reflect that a lot of “consumption ” is mixed in with the so-called “investment.”
One of these is fashion.
V. HAUTE FINANCE
“Fashion” has made a couple of appearances in finance. For years, there have been literal ref70
INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS / Vol. 5(l)
erences to a link between hemlines and economic performance (Shapiro, 1994). More
recently, we are seeing metaphorical references concerning investors who tend to follow
common patterns or styles of investment. 1 2 The fashion metaphor is pregnant with possibilities
that have largely been left unexplored; “fashion” is merely used as a synonym for the
pejoratives “fad” and “herd behavior”13 - a phenomenon noted by Keynes in his General
Theory (1936). Papers on investment “fashion” commonly attempt to develop rational (good)
explanations for this socially inefficient (evil) behavior - academic oenophiles pouring old
mythological wine into new methodological bottles. (Scharfstein & Stein, 1990; Banerjee,
1992; Greenblatt et al., 1995). But “fashion” in terms of clothing styles has been receiving
greater academic attention from a post-modernist perspective (Faurschou, 1987; Wilson,
1993), and “fashion” can be a far more useful metaphor for finance than it has been.
There are “fashions” in many things other than clothing - television (Jones, 1992) cuisine
(Levenstein, 1988; 1993), academic research, l4 etc. The essence of fashion - what distinguishes
it from style - is change (Davis, 1992); therefore, one is likely to find fashion wherever
one finds change,15 regardless of whether the attitude toward change is largely positive
(television), mixed (cuisine), or negative (academic research). There are, however, a number
of similarities between designing clothing and making investments that suggest a deeper significance
of the term “fashion” for finance.
First, successful couture is an unconventional design that eventually becomes conventional.
“The real aim of a fashionable purchase is not uniqueness but the appearance of
belonging to a company of leaders” (Fraser, 198 1, p. 12). Popularity must not occur too soon
to profit from the original design but soon enough that the original design be recognized as
the precedent.16 When a design becomes popular, it is no longer fashionable. Likewise, successful
investment must be fashion-anticipating. The only way to make money is to take an
unconventional position which later becomes conventional - you believe that the market
price ought to change, act upon your belief before it does, and profit when the change occurs.
When an investment becomes popular it is no longer profitable.17
Second, successful couture cannot transcend the boundaries of what is considered acceptable.
Likewise, successful investment must be fashion-conscious in that an institutional
investor’s style must not be so unusual as to cause concern in the event of insufficient profit.
Third, successful couturiers become prominent couturiers who at times can influence the
direction fashion will take and perhaps even expand the boundaries of what is considered
acceptable. Likewise, successful investors can be fashion-setting, with their activities moving
markets in their desired directions.18
Fourth, fashion is sometimes thought to be motivated by consumer boredom or perhaps
driven by capitalist exploitation of consumer ignorance and weakness (Davis, 1992). There
are, however, too many examples of rejected fashions - poufs, midis, and mini-revivals in
skirts alone (Fraser, 1981) - to conclude consumer helplessness. And “The existence of
street fashion demonstrates that a desire to adorn one’s body is not simply the result of being
duped by the fashion industry and capitalism” (Wilson, 1991, p. 25 quoted in Steel, 1996, p.
166). Likewise, prices can be moved by the noise trading of bored traders and/or by brokers
churning their customers’ accounts for their own profits, although again there is ample evidence
that most individual investors are actively interested in the contents of their portfolios.
The source of these four sociological similarities is that couture and investment depend on
managed change for their success. Both are industries in which change is desirable and where
it is possible to profit from anticipating and/or effecting appropriate amounts of it. (And both
the couture and investment industries are reported by symbiotic journalists who sustain the
illusion that activity and change are occurring when nothing at all is happening.) But change
Fashion and Finance 71
is also true of television and to a lesser extent cuisine (although not of academic research).
The reason fashion is an especially telling metaphor for investment is that, although couture
and investment industries are both interested in profit, but profit is not the main motivation
for either. At least for professionals, and for many amateurs as well, both dressing and investing
are done for non-financial reasons.
Key questions regarding couture are: “For whom does the fashionable woman19 dress -
herself or others? - and in what measure are her dress choices her own, and to what degree
are they shaped by advertising and business?’ (Benstock and Ferriss, 1994, p. 4). These same
questions ought to be asked of investors as well, but they never are. Traditional financial
research unequivocally asserts that investment decisions are made by the investor for the
investor. But investment decisions are not made in a social vacuum any more than are the
decisions to purchase and wear certain articles of clothing. To fully understand investment, it
is essential to consider the importance of the appearance of an investor’s decisions to others
and the importance of the investment decisions of others to an investor and to do so not under
some artificial, mathematically tractable set of assumptions, but in a real society.
Why is clothing worn? Certainly, it is worn for more than modesty and protection from the
environment. Whether we consider ourselves fashionable, anti-fashionable, un-fashionable,
or a-fashionable,*0 our clothing is an important sign of our identity. “Clothing draws the
body so that it can be culturally seen, and articulates it as a meaningful form” (Lemoine-Luccioni,
1983, p. 147 quoted in Silverman, 1986, p. 145). Clothing also plays an important role
in our social relations. “The acts of shopping, of wearing an article of clothing, of receiving
clothing as a gift, can be expressions of recognition and love between women, or between
women and men” (Sawchuck, 1987, p. 69). Furthermore, “Dress is a form of visual art, a creation
of images with the visible self as its medium. The most important aspect of clothing is
the way it looks; all other considerations are occasional and conditional” (Hollander, 1978, p.
311). In short, clothing is an elaborate semiotic system conveying complex social and cultural
messages (Lurie, 1981; Kaiser, 1990).
Especially at its high end, haute couture, fashion is about the creation or re-creation of a
self-image of power and sex. And at its high end, professional investment, so is finance,21
which is about more than return, but not as we might expect. Power and sex come from the
investment of money, not its consumption; it is not money that matters, but where it comes
from. Whose money has greater power, that of a lottery winner or a bond trader? Whose
money has greater sex appeal, that of a dissolute heir or heiress or an international currency
trader? Who becomes a “master of the universe” (Wolfe, 1988) or a “big swinging thingy?”
(Lewis, 1989). Financial markets offer their participants far more money than can ever be
consumed. There is no way to spend it all - one can even run for president of the United
States and never have to worry where the next Lamborghini and Parisian pied-a-terre will
come from. Making money (or even simply moving it around) can “buy” the power and sex
that money itself can’t.**
Few of us wear haute couture and few of us trade bonds or currencies, but we can still
involve ourselves in a small way. While a Versace gown or Armani suit may be too expensive,
a Chanel scarf or a Donna Karan tie are not. *3 While purchasing a block of Netscape or
Televisa may be beyond our budget or our expertise, we can manage to put a few dollars into
the Fidelity Technology Fund or the Templeton Latin America Fund. Just as more and more
couturiers have been licensing their names to accessories and related products, more and
more mutual funds are being created. These mutual funds are labeled like designer jeans -
creating the invidious impression that Dreyfus and Evergreen California municipal bond
funds differ, when they are likely to be as different as Calvin Klein and Bill Bias@ - and
72 INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS / Vol. 5(l)
marketed in a similar way.
We can dream even more inexpensively. Anyone can browse at Bloomingdales or through
a fashion magazine. For bus fare or the cover price, we can consume images of Westwood or
Gaultier creations - clothing that most would never dare to wear. Anyone can roam through
the third section of The Wall Street Journal for the price of the newspaper (or for waiting
until the subscriber has read it). In this grand financial department store, the world’s most luscious
commodities (ECU bonds, Nikkei futures, etc.) are on display for us. Though intimidated
by their apparent complexity and sophistication, we can still imagine owning them;
imagine trading them. The WSJ is a Victoria’s Secret catalog for S&P Midcap Index Option
fetishists. With Elle, Harper’s Bazaar, and Mirabella all costing more, it’s the most sophisticated,
erotic experience you can have for under a dollar.25
VI. FINANCE AND FASHION THEORY
That couture is undoubtedly a provocative metaphor for finance means more than the opportunity
to concoct clever analogies. The academic theories and models that have been created
to understand fashion can provide insights into finance. Sproles (1985) provides a concise
summary of behavioral science theories of fashion that can be used to suggest what might be
done for finance. He breaks these down into sociological models, communication models,
psychological models, economic models, cultural models, geographic models, historical
models, aesthetic models, and business-marketing models. Some of these are common in academic
finance, some have been considered, some have possibilities, and some are probably
irrelevant.
The basis for applying behavioral science theories to finance was discussed in Section IV
- that much of what we call “investment” is in fact “consumption.” To paraphrase Sproles
(1985), “[Financial markets are] dynamic mechanisms of change through which a potential
[investment instrument] is transmitted from its point of creation to public introduction, discernible
public acceptance, and eventual obsolescence.” (p. 56) He breaks this process into
six stages:
1. Invention and introduction. A source of fashion objects, such as a fashion designer,
entrepreneur, or consumer innovator, creates an object that is noticeably different
from its predecessors.
2. Fashion leadership. A small proportion of the most fashion-conscious consumers
adopt and introduce the fashion to the public.
3. Increasing social visibility. The fashion receives increasing endorsement among
other fashion-conscious consumers, thus becoming more visible among a wider
range of social groups and life-styles.
4. Conformity within and across social groups. The fashion achieves social legitimacy,
and the compelling forces of conformity, communications, and mass marketing
propagate widespread adoption of the fashion.
5. Social saturation. The fashion becomes a daily occurrence in the lives of many, and
in fact becomes overused, thus setting the stage for its decline.
6. Decline and obsolescence. New fashions are introduced as replacements of the
socially saturated fashion, and use of the old fashion recedes (Sproles, 1985, p. 56).
Fashion and Finance 73
Turning to the explanatory models and theories themselves, the sociological models
include the trickle-down theory (that fashions move downward through different classes) and
the collective behavior model (that fashions are mass movements). In finance, the former is
implicit in statements to the effect that “when clerks start passing on stock tips, it’s time to
exit the market,” and the latter in the references to “fads” and “herd behavior” noted in Section
V. The problem with finance is that trickle-down phenomena and collective behavior are
regarded as aberrations and not as fundamental processes that drive investment.
Communication models include the adoption and diffusion model, which concerns how
fashion is communicated, and the symbolic communication model, which concerns the semiotics
of fashion. While finance does concern itself with information and frequently builds
models incorporating “sophisticated’ and “naive” investors who are “insiders” and “outsiders”
in terms of access to information regarding investments, it never considers how “sophisticated”
investors as a social group are recognized by each other and by “naive” investors and
the aspirations “naive” investors might have to become “sophisticated” investors in order to
reap the benefits of “sophistication.” One would have to be a “naive” observer not to imagine
that these social processes have a profound effect on investors and that the social structure of
the investment community consists of many more than two levels.
Individual-centered models, conformity-centered models, and the uniqueness motivation
model all fall under the heading of psychological models. While the psychology of markets is
a recognized, but almost wholly neglected, subject in finance, these psychological models are
different. They concern why people invest, not just how they respond in markets to the
behavior of other investors. To finance academics, private investors are concerned only with
making an appropriate trade-off between risk and return. Professional investors are apparently
no different from those who choose other professions. In casual conversations, professional
investors are quick to acknowledge that their profession appeals to a certain
personality type. If so, both medicine and markets would be quite different, for example, if
physicians and professional investors were to trade places. (Of course, this swap would entail
the requisite training, which is far more important in medicine than markets.) If we believe
that Wall Street would be much different if staffed wholly by people that are now physicians,
social workers, teachers, or artists (of course, there is already a smattering of these people
there, but probably those who didn’t feel comfortable doing what they were doing), then we
must conclude that what markets are is a consequence of the psychology of the people who
make up those markets.
It would seem that the so-called “economic models” - the demand model, the scarcityrarity
model, and the conspicuous consumption model - would already be used by
finance. They are not. Only on rare occasions are individual securities thought of as commodities
having their own markets and their own supply and demand. Usually, individual
securities are treated as nothing more than risk-return bundles that can be perfectly duplicated
with appropriate combinations of other securities. Investors, however, are not indifferent
between Consolidated Edison and Consolidated Freight or between Continental Can
and Continental Airlines. The industries matter and the companies matter; consequently,
finance ought to be employing the same economic models that we apply to other consumer
goods.
Cultural models (subcultural leadership model, social conflict model, and cultural production
systems model), geographic models (spatial diffusion model), and aesthetic models (art
movement model, ideals of beauty model, and aesthetic perception and learning model) seem
to have limited relevance to finance itself, although aesthetic models might be of interest in
considering the meta-discipline of finance methodology as a form of art (Szostak, 1992), and
74 INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS /Vol. 5(l)
it is possible that other interesting applications might present themselves once the sociology
of inves~ent is seriously examined. 26 Historical models (historical resurrection model and
historical continuity model) have greater potential. Recently, old investment strategies have
been revived, repackaged, and remarketed (Kairys, 1992; Haugen, 1993, and a broader
understanding of this phenomenon is clearly called for.
Finally, not unexpectedly, business marketing models (mass-market model and market
infrastructure model) can be useful. The advertisements in Vogue are certainly influential in
fashion. The advertisements for investment companies and securities in The Wall Street Journal
and on television ought to be as well, or large sums of money are being wasted. And as
mentioned in Section V, there is quite an extensive financial press that must be influential in
the markets. Studies have indeed examined journalistic impacts on prices, but much more can
be done than the usual event studies (Huberman & Kandel, 1990; Desai & Jain, 1995).
Thus, the fashion metaphor does suggest numerous new ways in which to undertake
finance research and to understand financial activity. But the sine qua nun of accepting the
metaphor and adopting new ways is transcending the traditional, limited view of investment
as a pure, unadulterated, rational, “good” activity.
VII. CONCLUSION
There certainly is “investment,” but much if not most of what goes on under that label is
“consumption.” We consume “investment” as we consume “fashionable clothing” or “burgers
and fries.” How could it be otherwise? It isn’t possible for the financial services industry
to be free of the cultural considerations that we readily acknowledge shape the consumer
goods industry. It isn’t possible for the flamboyant traders who watch the Super Bowl from
private boxes and dine with supermodels in Milan to turn suddenly sober when it comes time
to push the button sending 15 billion yen halfway around the world. What difference does it
make what our return is, as long as we were in on Boston Chicken or Blue Star Airlines, as
long as we trade stocks for Gordon Getty or Gordon Gekko, as long as we date Darryl Hannah
or Darien Taylor? On Wall Street or in Wall Street, we’re players.*’
A post-modem theory of finance acknowledges this. We must go beyond the mechanical
metaphors, the myths of good and evil, and the reverence for questionably me~ingful quantification
that characterize the modernist tradition within which we now do research. That
finance is a part of popular culture does not diminish it in any way; it simply means that we
understand it differently. There is, however, a danger in pulling back the curtain to reveal the
real Wizard of Oz. We’ve conned some into believing that we have essential investment
expertise when we are just extinguishing a little of their value in our own consumption.
Sometimes, we’ve even conned ourselves into believing that we are engaged in the valuable
social function of allocating capital to its most efficient uses rather than churning it for our
own amusement. Exposing the con might mean that more than a few “players” will find
themselves back in Kansas.
NOTES
1. An identity is a statement, the truth of which is a necessary consequence of the meanings
of its terms.
Fashion and Finance 75
2. While we can easily come up with examples in which truth and reality are not equal,
our first impression is usually that they are, and we have to convince ourselves otherwise.
3. According to The Oxford English Dictionary (1989), the most general definition of
“output” is “The act or fact of putting or turning out; production; the quantity or amount produced;
the product of any industry or exertion, viewed quantitatively; the result given to the
world. (Originally a technical or local term of iron-works, coal-mines, etc.; appearing not in
general dictionaries till after 1880.)” Its earliest use as a noun was by Simmonds in the Dictionary
of Trade, defined as “a term in the iron trade for the make of metal or annual quantity
made” (OED, 1989).
4. Although Epicureans might regard consumption as “good” and “investment” as evil,
this is not a common philosophy.
5. Although some (the aforementioned Epicureans) might reverse the labels, there is still
one “good” and one “evil” choice.
6. The myth of good versus evil also appears within investment in the risk-return tradeoff.
As in a legendary quest, in order to achieve the greatest good (highest return), one must
confront the most dangerous evil (highest risk). Although no one can say what risk is, this
modernist trade-off reifies it and demands that it be measured.
7. Employees in the financial services industry often remark that they like being evaluated
by one number - their return. Such simplicity is itself a myth.
8. This new direction is more consistent with the non-economic meanings of “consumption.”
9. In the following quotation, “shopping” presumes an intention to purchase. The word
need not carry that connotation.
Shopping malls call forth the same psychological position as TV watching; voyeurism. Except this time, they
do it one better. Rather than flicking the dial, you take a walk from channel to channel as the neon stores flick
by.. Shopping malls are the real postmodem sites of happy consciousness.. [It is] not shopping at all and
certainly not the will to possession, but the whimsical act of looking at objects as being seductive-the pleasure
of the gaze as it plays fictionally with the possibility of possession, takes on and discards whole identities
associated with objects, and then moves on. (Kroker et al., 1989, pp. 208.209).
10. “But there are still times when women, men, and families can and will go to department
stores - not just because they need to buy but in search of stimulation and entertainment,
as if they were off to the movies. The department stores that will survive into the future
seem likely to be not necessarily those with the biggest or best choice of goods but those with
the most ingenious displays, the most dramatic decor, and a way of convincing shoppers that
they are places to see and be seen. Although department stores must continue to make sales,
that activity appears to be subsidiary to their broader social function as a form of theatre, with
the customers as the cast.. . Through such settings, people wander - scrutinizing each other
as they float up and down on escalators, and catching sight of their image in miles of reflecting
glass and chrome, in stores that are the mirror of our time.” (Fraser, 198 1, p. 263)
Il. Consider the following thought experiment. Finance textbooks recommend that corporations
solicit all project proposals from within the corporation and undertake those having
positive net present value. If this is a sound recommendation, then the most efficient allocation
of capital within an economy would be to solicit all project proposals from within the
economy and undertake those having the highest net present value up to the amount of capital
available. Note that this is not socialism, but a logical extension of capitalism - all capital is
privately owned and the allocation of capital occurs on a perfectly competitive basis. Choos76
INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS /Vol. 5(l)
ing the highest net present value projects from a list (admittedly, a very long list) is a simple
task. If the corporate finance literature is correct, we must conclude that the vast financial services
industry is expensive and unnecessary overhead.
12. A related metaphor, “window dressing,” describes the practice of buying and selling
securities to enhance the appearance of a portfolio (Lakonishok, et al., 1991).
13. As in Bikhchandani et al. (1992).
14. Certainly, Kuhn’s (1970) “paradigms” are research fashions. Finance definately has
its fashions in methods (ex. ARCH to GARCH to EGARCH) and metaphors (ex. market for
corporate control, signaling, etc.)
15. Of course, not all change is necessarily associated with fashion. For example, one
would be hard-pressed to attribute market price changes, without which no investment would
be profitable, solely to fashion, although some price changes certainly are.
16. The legendary designer Gabrielle Chanel remarked that fashion is made to become
unfashionable (Davis, 1992).
17. When applied to couture, the adjective “successful” means financially successful. It
is possible for a couturier to be critically or artistically successful without being profitable.
This clarification is not necessary for investment - if there are other forms of success (social
or political, for example), they come from financial success.
18. Few investors or couturiers may actually have that much power; rather, it may be
more a matter of successful investors and couturiers having a knack for anticipating the
desires of the market. “The truly successful designer has an instinct for visualizing sharply
what is perhaps nebulously and unconsciously desired” (Hollander, 1978, p. 351). “Fashion
designers are themselves aware that their success and their economic survival depend on their
discerning and anticipating the image that their customers have of themselves” (Fraser, 198 1,
p. 168). These quotations bear a marked similarity to Keynes’ (1936) famous quotation likening
financial markets to beauty contests.
19. Although fashion today is important to both men (Chenoune, 1993) and women, it is
more a concern of women and more a feminist issue. In the fifteenth, sixteenth, and seventeenth
centuries, however, fashion was a class issue, not a gender issue, and male attire was
often the richer and more elegant. (Silverman, 1986)
20. “[Fashions] are often deliberately resisted - by people who despise fashion as a
vessel of conformity, of copying other people’s habits, particularly if it involves changing
their own. They tend to forget that their own way of dressing conforms to obsolete fashions,
perhaps revolutionary in their day, that have come to have the flavor for them of inviolable
personal laws” (Hollander, 1978, p. 360).
21. “Power dressing” (including the notorious “power tie”) was a fashion trend of the
1980’s (Steele, 1996) just as “power lunching” was a business trend.
22. “The first phase of the domination of the economy over social life brought into the
definition of all human realization the obvious degradation of being into having. The present
phase of total occupation of social life by the accumulated results of the economy leads to a
generalized sliding of having into appearing” (Debord, 1983, paragraph 17).
23. “Purchasers would get the feeling that they were acquiring not mere things, like
sheets or blue jeans, but a little piece of the person whose signature those things bore - a
few essential drops of that person’s life, looks, wealth, success, and fame” (Fraser, 1981, p.
259).
24. “Everyone, without exception, whom I interviewed and spoke with in the course of
my research on fashion interpreted designer jeans in this light [as a prominent status marker].
Most felt that status distinctions were the only reason for designer jeans because, except for
Fashion and Finance 77
the display of the designer label, they could detect no significant difference between designer
and nondesigner jeans” (Davis, 1992, p. 76).
25. In the film Wall Street, Charlie Sheen’s character commented “Making love to her
was like reading the Wall Street Journal.” It might have been a compliment.
26. Readers interested in more details on these and other models mentioned in this section
should consult Sproles (1985), which provides brief descriptions and selected references.
27. Besides, wherever we are on the return scale of the Cartesian graph, we can find a
risk scale that makes us look good.
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