Highlights - March 2012

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Will borrowing money to buy a new car make you feel richer?  It depends on your net worth, says a new study in Psychological Science, a journal published by the Association for Psychological Science. According to Princeton psychology graduate student Abigail B. Sussman, who co-authored the study, “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.” In fact, increasing your assets by taking on debt affects perceived wealth in opposite ways for people who are in the red or in the black. The participants in the study had average household incomes of $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.  When net worth was positive, more respondents called those with less debt wealthier than those with higher debt and more assets. By contrast, those in the red were perceived as wealthier when they had higher assets, even though accompanied by higher debt. Why these fickle responses?  Sussman explains, “People generally like assets and dislike debt, but they tend to focus more on one or the other depending on their net worth.  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.” These findings challenge classical theories that net worth matters most in people’s feelings about their financial situations.  And, says Sussman, understanding the nuances the study reveals can help predict economic behavior that otherwise appears puzzling.   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.

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Psychological...

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