SCIENCE

Money is in the Eye of the Beholder

A new study shows that our perceptions of wealth don’t always match up with reality

January 13, 2012

Perceptions of wealth are often more complicated than just net worth, a new study indicates. Photo courtesy of flickr user AMagill

A recent thread on the urban parenting site Urbanbaby.com asked a simple pair of questions: What is your household income, and how rich do you feel? The resulting contradictions of income and perceived wealth drew widespread remark—and some scorn. One commenter, from New York City’s Upper East Side, makes $350,000 per year and feels “so, so, so poor.” Another earns $1.2 million and feels upper-middle class, while a third, with an income in the $180,000 range in the D.C. suburbs, feels rich.

How is this all possible? Everyone knows the old platitude “beauty is in the eye of the beholder.” A recent psychological study indicates that wealth is just the same. A new paper, published in the January issue of Psychological Science by Princeton researcher Abigail Sussman, demonstrates that total net worth is not the only thing that influences perceptions of wealth, whether for ourselves or others.

If you were asked to consider two individuals—Mr. Blue, who has $120,200 in assets and $40,200 in debt, and Ms. Green, who has $80,200 in assets and just $200 in debt—who do you think is better off? Of participants in the study, 79% said Ms. Green, although net worth is the same for both. When assessing those with positive net worth, having a lower degree of both assets and debt was seen as better than having more of each.

On the other hand, when considering a pair of individuals with equal negative net worth—say, Mr. Red, with $42,400 in assets and $82,400 in debt, and Ms. Gray, with just $400 in assets and $42,000 in debt—77% of respondents more often said that Mr. Red was wealthier. Having more assets, as well as more debt, was generally perceived as better.

What’s going on? Why do the trends move in opposite directions depending on whether the individuals were in the black or red? 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 are more than just interesting—they seem likely to affect real lending and borrowing patterns. A second part of the study asked participants to imagine themselves in each of the scenarios, and then say how willing they would be to borrow money for purchases like a bathroom renovation or television. Again, people with positive net worth saw themselves as wealthier—and more willing to take on a loan—if they had fewer assets and debt to start with, and the reverse held true for those with negative net worth.

The study’s conclusions challenge traditional assumptions of classical economics—and, Sussman says, can be crucial in understanding otherwise puzzling economical choices we see in the real world.