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The Psychology of Perceived Wealth

The Asymmetric Role of Assets and Debt. The Psychology of Perceived Wealth. Abigail Sussman & Eldar Shafir Princeton University. A0. Wealth. Drives economic behavior and well-being. $1 ≠ $ 1 Diminishing marginal utility (e.g. Bernoulli , 1738/1954)

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The Psychology of Perceived Wealth

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  1. The Asymmetric Role of Assets and Debt The Psychology of Perceived Wealth Abigail Sussman & Eldar Shafir Princeton University A0

  2. Wealth • Drives economic behavior and well-being • $1 ≠ $1 • Diminishing marginal utility (e.g. Bernoulli, 1738/1954) • Relative factors (e.g. Easterlin, 1974; Frank, 1999, 2007) • Conspicuous consumption (e.g. Veblen, 1899)

  3. Behavioral Insights • Malleable financial decisions • Choices driven by • Budgeting process (e.g., Heath & Soll, 1996) • Accessible accounts (Morewedge et al., 2007) • Current income(e.g., Thaler, 1999)

  4. Current Research • How do assets and debt factor into perceptions of wealth?

  5. Experiment 1Assets and Debt • Compare profiles with equal net worth • Within questions • “High” profile had high debt and high assets • “Low” profile had low debt and low assets • Across questions • Net Assets (“in the black”) • Net Debt (“in the red”)

  6. Experiment 1Assets and Debt • Net Assets • Bob has $11,000 in assets and $1,000 in debt (Low) • Jim has $20,000 in assets and $10,000 in debt (High) • Net Debt • Dave has $1,000 in assets and $11,000 in debt (Low) • Steve has $10,000 in assets and $20,000 in debt (High)

  7. Study 1a Who is better off financially? • Net Assets • Bob has $11,000 in assets and $1,000 in debt (Low) • Jim has $20,000 in assets and $10,000 in debt (High) • Both men have substantial access to credit. • Net Debt • Dave has $1,000 in assets and $11,000 in debt (Low) • Steve has $10,000 in assets and $20,000 in debt (High) • Both men have substantial access to credit.

  8. * * * * Study 1aResults * p < .001

  9. Study 1b Which situation would you rather be in? • Comparing two people in the black • 93% would rather have low debt and low assets • Comparing two people in the red • 66% would rather have high debt and high assets (p<.001)

  10. Experiment 1 • Who is better off financially? • Which situation would you rather be in?

  11. Experiment 2Financial Decision Making • Willingness to: • Borrow • Lend • Pay

  12. Study 2aWillingness to borrow • Would you be more likely to borrow to buy a [TV] if you had... • Choice between 2 profiles constructed as in Experiment 1

  13. Study 2aResults- I would borrow if… • Comparing two profiles in the black • 82% would borrow with the low profile • Comparing two profiles in the red • 64% would borrow with the high profile (p <.001)

  14. Study 2bWillingness to Lend • Do the same patterns apply to decisions that affect others? • Imagine you are a loan officer • Which applicant is in a better position to receive a loan? • Choice between 2 profiles constructed as in Experiment 1

  15. Study 2bResults- Who should receive the loan? • Comparing two profiles in the black • 75% say the person with the low profile • Comparing two profiles in the red • 74% say the person with the high profile (p <.001)

  16. Study 2cWillingness to pay • Imagine you have $X in assets and $Y in debt. What is the most you would pay for…? • Profiles presented sequentially • 4 profiles • Negative and positive net worth • High and low assets/debt

  17. * * Study 2cResults *p ≤ .02

  18. Experiment 3An attentional account • Economic “pop out”

  19. In the black… $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

  20. In the red… $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

  21. Study 3Direct measure of attention • Saw two wealth profile pairs with short personality descriptions • Attention measures • What are the first thoughts that come to mind? • Did assets or debt matter more?

  22. * * * Study 3Results- Attention * p <.01

  23. Summary 1. Who feels wealthier? 2. Who spends and borrows more? 3. Who pays attention to what?

  24. Alternate Accounts • Financial incentives • Ability to file for bankruptcy • Personality inferences

  25. Consequences • Perceived wealth  economic wealth • Impulses misaligned with financial interests

  26. Thank you

  27. Study 3aAsset and debt correlations • 2 ranking questions • 10 profiles each • +36,000 in the black • -$36,000 in the red • Varied amount of assets and debt

  28. Study 3aResults 1

  29. Study 1cPreference Reversals • Ranked 5 profiles • Who is best off financially? • 1=best to 5=worst • Profiles diverged by up to 27% • Varied levels of debt/ assets

  30. Study 1cResults * Pairwise comparison to top profile in set, all ps< .03

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