In victory or defeat: Consumption responses to wealth shocks

Using a novel representative sample of digital payment and fund investment data, we observe a robust U-shaped relation between individual investors’ consumption and their financial wealth shocks. Contrary to the prediction of the wealth effect, individuals increase their consumption shortly after experiencing large positive and negative wealth shocks. The unexpected increase in consumption following negative wealth shocks is particularly pronounced when consumption with “hedonic” nature, such as entertainment-related purchases, is examined. We show that this 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.