The Negative Wealth Effect – Or: How Neuroeconomics Hits a Small Town in Texas

David Krueger MD

I was talking with the owner of one of our favorite antique stores in an area close to our weekend ranch. He said, “People are just not spending money.” The downtown area of the little town was somewhat dead, and the nursery where we frequently visit had few customers.

He continued, “They don’t seem to be out of jobs, no one is making any less money, but people just aren’t spending.”

Since I believe homespun research can come close at times to the neuroeconomics lab, I asked why he felt this was the case.

Everybody is watching the news too much.”

The positive wealth effect occurs when rising values of homes, stock portfolios, and retirement accounts make people feel wealthy. Even though no one takes a single dollar from these assets, the heightened mood results in spending more.

People feel the impact of the economic downturn in an inverse way: the negative wealth effect. Even though they make the same money at their same job, people spend less.

We spend not according to how much money we have, or even what we need, but we spend according to how we feel.

Neuroeconomists have demonstrated that people who are fearful cling to what they have. Our nervous systems constrict in a primitive but adaptive effort for survival. With this withdrawal and fear, people reduce spending. The condition people seek to avoid becomes what they bring about. When fear is dominant, money may not only be constricted, but horded. Since we make what we do hitchhike on something conscious and logical so that it makes sense, consumers become “risk-adverse” and hunker down. Spending gets a bad reputation.

A study at the University of Toronto demonstrated that when people are in a positive mood, their visual cortex takes in more information. In a positive mood people both see and process a greater number of possibilities in their environment. A good mood enhances the size of the window of their perspective.

The emotional contagion (“collective tilt”) of the economic downturn has the reverse effect on spending of an expanding economy—even without a direct impact on the individual. Increased tension produces both emotional regression and narrows perspective. The stress hormones of epinephrine and cortisol block information processing.

For both good and bad stress, a modicum of balance is crucial to regulate states of mind. Look for opportunities to see the big picture when a natural inclination is to remain hyper-focused. Being grounded and centered allows a state of mind for optimum synthesis of thinking with access to existing knowledge. When you’re relaxed and centered, you have the greatest access to all your states of mind—all the information you possess.

From a Buddhist teaching: “Return to the earth now if your mind is troubled and your heart is uncertain, for it is by returning to the beginning that we can clearly see the path.”

A reminder: The Teleseminar series Your New Money Storystarts Tuesday, September 29, 2009 at 7:00 PM Eastern for five Tuesdays. It is recorded for schedule conflicts.
Your New Money StoryWorkbook with 48 annotated exercises and work tools will illuminate your money story and systematically guide you to write a new one.