The Wealth Effect

There is a concept in the field of economics known as the wealth effect. This effect refers to an increase in household spending that coincides with a perceived increase in household income or wealth. In other Words, if you suddenly see your stock portfolio climbing or you receive a raise at work, then you’re more likely to start spending more.

This positive correlation between wealth and propensity to spend has been well documented and borne our by countless economic studies. But there is a second effect of wealth, a new wealth effect that is coming out of the field of behavioral economics. This one doesn’t have to do with an individual’s propensity to spend as much as it has to do with their propensity to be a jerk.

In March of this year, the Freakonomics blog had a post entitled “The Wealth Effect: It Ain’t Pretty”. The post mentioned a Boston Globe article by Britt Peterson. Let’s look at a quote from Peterson article:

“Rich people have a harder time connecting with others, showing less empathy to the extent of dehumanizing those who are different from them. They are less charitable and generous. They are less likely to help someone in trouble. And they are more likely to defend an unfair status quo. If you think you’d behave differently in their place, meanwhile, you’re probably wrong: These aren’t just inherited traits, but developed ones. Money, in other Words, changes who you are.”

These aren’t just Words of a journalist writing an article; they’re backed up by recent studies into human behavior and money’s effect on it. And while we all know the old adage that money can’t buy happiness, recent studies have actually shown that excess wealth can have a negative effect on ones ability to be happy. Medical News Today reports that “Rates of depression are much higher in countries with higher income rates overall.”

If this new wealth effect is true then what are we to do? I would say we should focus on what makes us truly happy in life. While many assume that they “need” more money to be happier this simply isn’t the case. I’m sure you’ve heard the Words of that great philosopher The Notorious B.I.G., “[More] money [more] problems”. Check out the link to the Forbes article below to see how and why a higher income may be tied to more problems and tips for you in dealing with your money and your happiness.

Links to cited sources:

http://www.freakonomics.com/2012/03/02/the-wealth-effect-it-aint-pretty/

http://www.medicalnewstoday.com/articles/231835.php

http://www.forbes.com/sites/learnvest/2012/04/24/the-salary-that-will-make-you-happy-hint-its-less-than-75000/