In Victory or Defeat: Consumption Responses to Wealth Shocks

53 Pages Posted: 20 Oct 2022

See all articles by Alex Imas

Alex Imas

University of Chicago - Booth School of Business

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Yan Luo

Fudan University - School of Management

Xiaohuan Wang

Shanghai National Accounting Institute

Date Written: October 19, 2022

Abstract

Using a novel representative sample of digital payment data, we observe a robust U-shaped relationship between individual investors’ monthly entertainment-related consumption and stock market returns in the previous month. Contrary to the prediction of the wealth effect, individuals increase their entertainment-related consumption after experiencing large positive and negative stock market shocks. We show that the latter effect, termed “financial retail therapy,” is consistent with a dynamic model of Prospect Theory, and provide further evidence for it in a controlled laboratory experiment. Finally, we show that our results are not driven by income effects or wealth shock measurement errors.

Keywords: Wealth shocks, Consumption responses, Behavioral finance, Individual investors, Financial retail therapy, Digital payment data

JEL Classification: D10, D14, G12, G41, G51

Suggested Citation

Imas, Alex and Lin, Tse-Chun and Luo, Yan and Wang, Xiaohuan, In Victory or Defeat: Consumption Responses to Wealth Shocks (October 19, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-141, Available at SSRN: https://ssrn.com/abstract=4253053

Alex Imas (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yan Luo

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Xiaohuan Wang

Shanghai National Accounting Institute ( email )

200 Panlong Rd
Qingpu Qu
Shanghai Shi, Shanghai
China

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