A provocative new research study challenges traditional theories used to explain consumer spending and a person’s financial actions.
In the old theory, the concept of net worth (value of a person’s assets – total liabilities) was believed to be the primary factor by which people perceived their individual financial status – a perception that influenced purchasing and saving behavior.
In the new study, researchers discovered “people’s perceptions of wealth vary not only as a function of their net worth, but also of the amount of assets and debt they have,” says Princeton University psychology graduate student Abigail B. Sussman who wrote the study with Princeton professor Eldar Shafir.
As an example, for some, borrowing money to purchase a new widescreen television, or perhaps a car, may make them feel richer.
In fact, researchers discovered increasing your assets by taking on debt affects perceived wealth in opposite ways for people who are in the red (their debt outweighs their assets), or in the black (their assets outweigh their debt).
Investigators recruited participants from the online platform Mechanical Turk. All were U.S. residents, average age 36, with average household incomes from $50,000 to $75,000. In six experiments, subjects considered pairs of financial profiles.
In each pair, both profiles had equal positive or negative net worth, but one indicated lower debt and lower assets, while the other had relatively higher debt and assets.
The first experiment tested perceptions: Participants were asked which person or household was financially better off.
Researcher found that that when net worth was positive, participants perceived those with less debt to be wealthier than those with higher debt and more assets.
However when net worth was a negative, participants perceived an individual wealthier if they had higher assets, even though accompanied by higher debt.
Considering similar profile pairs, subjects were asked whether they’d borrow to buy something they couldn’t pay for outright—a luxury like a motorcycle or a necessity like bathroom repairs—or whether, as a loan officer, they’d lend to someone to do so.
Again, positive-net-worth people with low debt and negative-net-worth people with high assets were more likely to borrow or be seen as credit worthy.
Investigators believe the different perceptions of wealth occur because people generally like assets and dislike debt, but they tend to focus more on one or the other depending on their net worth, says Sussman.
“We find that if you have positive net worth, your attention is more likely to be drawn to debt, which stands out against the positive background.” On the other hand, “when things are bad, people find comfort in their assets, which get more attention.”
Sussman and her colleagues believe the study may help to predict economic behavior that otherwise appears puzzling.
For example, a person deep in debt may borrow to buy a new car, while a person with positive net worth may skip the loan and the car. And both are likely to feel wealthier for doing so.