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and finance Allah shmoop What is the wealth effect All

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right people when your stock portfolio is climbing like that

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little mountain climber guy on the price is right you

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just might feel like yodeling for joy Or maybe you

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just dance a little either way that happy feeling is

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caused by the wealth effect with wealth Effect is in

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economic theory which states that people spending habits correlate with

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the ups and downs of their unrealized well like stocks

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and investments in real estate In you know owning your

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own home When your stocks are on the upswing you

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might find yourself spending thanks to a newfound economic confidence

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a new appliance here you know a new TV there

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Yamagata It also means that when economic doom and gloom

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arise from the ashes of ah burst housing bubble for

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example causing your house's value to tumble down words well

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then you'LL start spending less Maybe you'LL start eating at

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home for lunch more often and maybe we'LL postpone that

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trip Teo Tasmania wherever people go in an aggregate sense

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the wealth effect suggests that consumers are spend happy during

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bull markets and that they go into defense of savings

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mode during bear markets right kind of makes sense Well

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Wealth of act might affect us mere mortals but it

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wouldn't affect *** economicas The theoretical perfectly rational economic agent

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Po Mo Economicas would see that because this wealth is

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yet to be realized it's no reason to change spending

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habits Stock prices that went might fall again before you

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cash them in and it's likely that the housing bubble

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won't keep housing prices down forever Yet we real humans

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with our monkey brains can't help feel the excitement that

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comes with rising investments in the fear that comes with

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falling investments Of course if an investor was living off

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of well his or her dividends while those dividends would

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be the source of their income right the cash the

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Levant which is more of an income effect thing than

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a wealth effect thing Either way the wealth effect is

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wound Just a theory some economists point to It is

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a way to explain some peculiar economic event For instance

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a ten percent tax increase in the late nineteen sixties

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did not stop consumers from spending like it was payday

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every day grabbing That's a stock portfolio bull by the

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horns while politicians and economists like we're baffled and they

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ruffled Well that's not how this was supposed to go

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another economist shout here say calling the wealth effect a

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bunch of hooey Like a bad theory it doesn't mean

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anything They say that the wealth effect is upside down

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That increased spending probably leads to asset or investment appreciation

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not vice versa Still other economists say that even if

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the wealth effect is a really thing well it has

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such a teeny tiny effect on the economy That is

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kind of a moot point in the aggregate To spend

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or not to spend That is the question to check

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your portfolio or not That is another question Well what

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would *** economicas dio Yeah let's do what he does

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