Let’s get one thing out of the way first: compared to spending nine hours freezing in Times Square with no food, no drink, nowhere to sit, and nowhere to pee, any right-minded person should prefer to spend $400 for the chairs and toilets and warmth and comfort (and open bar) being offered by Olive Garden on New Year's Eve.
But here’s the thing: you can get exactly the same value – the chairs, the toilets, the warmth and comfort of Olive Garden, and you can order as many drinks as you like, any other night of the year, for much, much less money.
So why the premium on New Year’s Eve? It’s not like you’re at risk of missing New Year’s if you’re not in the Times Square Olive Garden: time waits for no man, and you’re going to find yourself in 2016 whether or not you’re anywhere near midtown Manhattan. There are even clocks in other places, which can tell you just as accurately as the Times Square ball what the time is, and when the year is going to tick over.
Which means that the reason for the premium is, at heart, the other people in Times Square: it’s all those hundreds of thousands of people who are not in Olive Garden. Getting a coveted spot in the Olive Garden is only valuable insofar as it allows you to be superior, in some way, to the crowd in the plaza below. Without all the plebs outside, the Olive Garden is just, well, an Olive Garden.
Being inside the Times Square Olive Garden on New Year’s Eve, then, is what economists call a “positional good” – it’s something with relatively little innate value, and which rather derives its value mainly by being superior to some lesser alternative.
One common example is early boarding privileges on airlines: the earlier you are in the sequence, the more valuable your positional good becomes, and airlines make billions of dollars monetizing that value in various ways. Similarly, there are millions of Americans who go out of their way to fly certain airlines rather than others, often changing planes rather than flying direct, just so that they can maintain elite status and board early.
There are billions of dollars to be made selling people the ability to feel superior to other people, and it’s one of the fastest-growing segments of the economy. Look at the rise and rise of bottle-service nightclubs, for instance, which have defiled the broadly democratic house music of 1980s Detroit or Manchester by turning it into a vehicle for elitism and conspicuous consumption. But positional goods in the music industry are hardly a new thing: the Hollywood Bowl, for instance, which opened in 1922, is something of an architectural masterpiece in the way that it is designed to make almost every single visitor incredibly jealous of the people sitting in front of them. The hierarchy is clear, and does a great job of encouraging Angelenos to pay through the nose for incrementally better seats.
Or, to take one of my favorite examples, look at the apartments on the 48th and 49th floor of 200 Central Park South, one of the new breed of “skinnyscrapers” going up in New York with fantastic views in all directions. They’re both full-floor apartments, about two thirds of the way up the tower; their views and their floorplans are identical. But the apartment on the 49th floor, at $69 million, is priced $5 million higher than the $64 million apartment on the 48th floor. That $5 million is pure positional rent.
Positional goods are often pretty bad buys. When Rupert Murdoch downgraded himself from a skyscraping triplex to a much cheaper ground-hogging townhouse, for instance, it was because he realized that airless apartments can be much less pleasant than well-designed homes, even when they cost $72 million. Or look at business-class seats on airplanes: you can spend much more money than the cost of a super-luxury hotel suite, for less comfort than you can get just hanging around at home on your sofa. If you have to fly anyway, then they’re significantly nicer than economy class, but the experience is not one anybody should be desperate to have.
Which leads to a general rule of positional goods, which is that they nearly always seem much more attractive when you’re aspiring to them than they do when you’re actually experiencing them.
So here’s a good way of saving money in the new year: don’t judge positional goods from the outside. You might feel a little bit of envy at the people experiencing them. But those people, I can assure you, aren’t feeling the benefit of those experiences at all. They’re probably just equally jealous of the people one step further up the chain than they are.