The wealth effect: How perceived prosperity drives spending—and how to stay in control
You’re standing in the elevator lobby of your 14th-floor apartment, scrolling through e-commerce deals on your phone, though you have no intention of making a purchase. Without much thought, you click ‘Buy Now.’ Read this | Navigating - and optimising - the three phases of wealth creation What’s at play here is the “wealth effect," a concept that describes how an increase in perceived wealth—whether from rising home values or a surging stock portfolio—encourages more spending, even when actual income remains unchanged. The mental trap The wealth effect isn’t based on actual cash but is a psychological shift, much like the feeling of walking on a thick carpet that feels softer than a bare floor. Read this | Mastering wealth management: The role of psychology in decision making and financial success This trap often leads to decisions that feel satisfying in the short term but can harm long-term financial health: Upgrading cars prematurely, where the excitement fades but higher loan payments remain. Conversely, the reverse wealth effect—a decline in perceived wealth—can trigger unnecessary austerity or poor financial decisions motivated by fear.
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