A-Z Popular Blog Economics Search »
Moral Hazard

7 Examples of the Wealth Effect

The wealth effect is the tendency for people to spend more as their wealth increases and spend less if their wealth declines. The following are illustrative examples.

Real Wealth

Real wealth is the value of wealth adjusted for inflation or deflation. For example, a stock position that goes up in value from $1 million to $2 million or 100% where inflation over the same period is only 5%. This may inspire an individual to take an expensive vacation or to renovate their house.

Nominal Wealth

Nominal wealth is the dollar value of wealth without considering inflation. People tend to neglect inflation and think in purely dollar terms. For example, if your stocks go up in value 10% and inflation is also 10% your wealth hasn't changed but you may feel more wealthy nonetheless.

Paper Wealth

Paper wealth is an increase in the value of assets that haven't been sold. This term particularly applies to relatively difficult to sell assets such as real estate. For example, homeowners may feel more wealthy and spend more when real estate prices are going up even if they have no plan to sell their home. This may be somewhat irrational as increased housing prices don't necessarily increase your spending power in the long run. If you sell your home you still need a place to live such that any profit may go towards future housing costs.

Perceived Wealth

The wealth effect can be driven by perceptions of wealth such as a farmer who owns 500 acres of land who feels the land must be worth more and more as a nearby town grows closer due to expanding suburbs.

Wealth Expectations

Individuals predict the future when making economic decisions and may spend more if they feel their wealth will soon increase. For example, if your investments increase in value by 20% in a week you may feel that this will continue into the future such that you will soon double your wealth. This may increase your confidence to spend now.

Virtuous Cycles

A strong economy creates a wealth effect that causes more consumer spending and a stronger economy. This is a positive feedback loop that can lead to economic bubbles as consumers eventually become irrationally optimistic and overextend themselves.

Vicious Cycles

People spend less when they feel their wealth has gone into decline. This can make economic problems worse as declines in asset prices cause a decrease in spending that can lead to further declines in asset prices.
Overview: Wealth Effect
The tendency for wealth perceptions to influence spending.
Related Concepts

Behavioral Economics

This is the complete list of articles we have written about behavioral economics.
Agency Cost
Attention Economics
Bounded Rationality
Consumer Economics
Consumer Economy
Free Riding
Herd Behavior
Rational Choice
Wealth Effect
If you enjoyed this page, please consider bookmarking Simplicable.

Behavioral Economics

The definition of behavioral economics with examples.

Free Riding

The definition of free riding with examples.

Greed Is Good

An overview of greed is good with examples.


The definition of overconsumption with examples.

Consumer Economy

An overview of the consumer economy with examples.

Hawthorne Effect

An overview of the Hawthorne effect with examples.


An overview of equilibrium with examples.

Behavioral Finance

A list of the core ideas of behavioral finance.

Herd Behavior

The definition of herd behavior with examples.

Class Consciousness

The definition of class consciousness with examples.

Expectancy Theory

The definition of expectancy theory with examples.

Dumb Money

The definition of dumb money with examples.

Investing Strategy

A list of investing strategies in the real world.

Capitalism Examples

An overview of capitalism with examples.

Externality Example

An overview of externalities with examples.
The most popular articles on Simplicable in the past day.

New Articles

Recent posts or updates on Simplicable.
Site Map