Last summer, June 10 to be exact, a Slate writer published a piece about the fallacy of an economic theory called the wealth effect, which essentially states that when people are objectively wealthier, or subjectively think or feel wealthier, their spending rises.
In the behavioral economics setting, the wealth effect has come up prominently in the famous mug trading experiments supporting the endowment effect. Some economists initially worried that the experiment’s results were driven by a wealth effect in which those given mugs were wealthier than those without mugs leading them to value mugs more than money. But back to the point about crowd wisdom.
Zubin Jelveh wrote a response to the Slate piece, linking to statistics and papers showing some evidence of the wealth effect during the past housing boom. At the time, he noted that wikipedia’s entry on the wealth effect contained only one reference citation on the subject – to the Slate article debunking it! – and pleaded, “Wisdom of crowds don’t fail us now.” Seven months later, not much has changed. Jelveh’s piece is now listed at the very bottom of the page, under external links, not references. In the entry itself, the only sentences about the theory’s validity claim “it is not observable in economic data,” before going on to cite some points from the Slate piece.
Tags: wealth effect