Wealth effect

Nate Silver describes the wealth effect in The Signal and the Noise:

“Nonhousehold wealth – meaning the sum total of things like savings, stock, pensions, cash, and equity in small businesses – declined by 14% for the median family between 2001 and 2007. When the collapse of the housing bubble whiped essentially all their housing equity of the books, middle-class Americans found they were considerably worse off than they had been a few years earlier.

The decline in consumer spending that resulted as consumers came to take a more realistic view of their finances – what economists call a “wealth effect” – is variously estimated at between 1.5% and 3.5% of GDP per year, potentially enough to turn average growth into a recession.”

When people believe themselves to be wealthier, they tend to spend more money.

This rule of thumb seems to hold true even when wealth is tied up in assets.

For example, although a rise in the value of your property doesn’t provide you with more cash right now, it does seem to cause you to spend more.

Alternative, although a fall in the value of your stock portfolio doesn’t reduce the amount of money available to you right now, it does seem to cause you to spend less

 

Hey. I’m Alex Murrell. I'm a Planner at Epoch Design in Bristol where I help deliver highly creative, innovative and effective pack, instore and online communications for some of the world’s biggest FMCG brands. Want to know more? You can find me on Twitter or LinkedIn.

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