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What is reverse wealth effect? MintGenie explains

The concept of ‘mass psychology’ is often used to explain the driving force behind financial markets.

Investors’ behaviour of spending less during a market fall is known as reverse wealth effect.

This is due to their insecurity about declining wealth, despite any fall in income.

On the other hand, when asset prices rise, consumers feel wealthier and tend to spend more. This is known as the wealth effect.

Central bank’s policies also have an impact on the wealth effect and reverse wealth effect.

When rate cuts are implemented, investment gains lead to an increase in demand and boost consumption.

On the contrary, when rates are raised amidst high inflation, asset prices fall and consumers experience a erosion in wealth.

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Have you wondered whether consumption tends to decline during bearish market when investors witness mark-to-market losses. This is known as reverse wealth impact —psychological impact of witnessing a decline in investors’ wealth.

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What is reverse wealth effect? MintGenie explains

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