Uploaded July 2020 | Updated September 2026, 26 minutes ago

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As the name kind of suggests, the wealth effect theory revolves around the idea that if asset prices go up and people "feel" wealthier, they will end up spending more despite the fact that we are in the realm of unrealized gains and that unless they sell assets such as real estate, they will not actually have more "real world" money at their disposal.


As explained in this video, there is a fair bit of truth behind the theory but also... well, a fair bit of nuance involved. For example, research by economists Karl Case, Robert Shiller and John Quigley made it clear that not all assets are created equal from the perspective of the wealth effect, with the effect in question being more pronounced when it comes to real estate as opposed to shares, for example.


The same way, it is important to note that the wealth effect theory refers to just one of the many variables that have an effect on consumer spending... once again, "nuance" is the operative word.


In other words, as explained by this video:


1) Will you spend more if you feel richer? Maybe, but there is a lot in the way of nuance associated with the wealth effect


2) Should you? No :)