Rich People Hate Debt, Poor People Hate Not Having Stuff
December 21, 2011 1 Comment
Nearly everybody has taken some blame for the slow economy — Democrats, Republicans, Goldman Sachs, Freddie Mac, Easy Mac, EasyJet, Benny and the Jets, etc. Human psychology is also a big culprit, and a new study by two Princeton researchers on perceptions of wealth adds another reason why our brains are to blame.
The researchers asked subjects for their impressions of the financial situations of fictional people who had the same net worth but different levels of debt and assets. For example, subjects might be told about two people with a net worth of -$24,000, with one person having $12,000 in assets and $36,000 in debt, and the other person having $40,000 in assets and $64,000 in debt. Subjects were asked about groups that had both positive and negative net worth.
What the researchers found was that people with positive net worth felt and were seen as wealthier when they had less debt, even if they had a correspondingly smaller number of assets. Conversely, people with negative net worth felt and were seen as wealthier when they had more assets, even if they had a correspondingly larger amount of debt. In other words, if your overall net worth is negative and you want to feel better about your financial situation, the best course of action isn’t to pay down your debt, it’s to take out another loan and buy more stuff. Can you say “credit bubble”?
Perhaps the most depressing part is that this happens despite market forces encouraging the opposite.
People in the red would likely face higher interest-rate debt and lower-return investment opportunities, which make additional debt financially unappealing, whereas those in the black would have access to lower interest rates and better investments, which might encourage additional debt. Instead, we found the opposite pattern.
If you think about it, the results of the study are somewhat intuitive. You may have a hard time feeling wealthier than your neighbor because your mansion has one more bedroom, but if your neighbor is still paying off loans from his son’s MFA degree it’s easy to claim your status is higher. Similarly, when people are already in the red adding more debt doesn’t jump out as a big deal, but having a new car may seem like a big step up. Perhaps if the world was like that mutual fund commercial where people have their debt publicly displayed in bubbles hovering over their heads things would be different, unfortunately, the technology isn’t there yet.
Sussman, A., & Shafir, E. (2011). On Assets and Debt in the Psychology of Perceived Wealth Psychological Science DOI: 10.1177/0956797611421484