Reverse Wealth Effect of Wishful-Thinking Giving

There is substantial evidence of a positive wealth effect of stock markets on consumption, as a rise in asset prices makes people feel richer and thus increase consumption. However, List (2011) finds that donors react much more strongly to an increase in the S&P 500 than to a decrease in the S&P 500, which conflicts with traditional theory. Using transaction-level data from the largest commercial banks in a developed Asian economy, we construct a monthly panel that simultaneously observes investment, consumption, and donation behavior. We find that having a book loss on the fund last month increases the amount of donations the following month by 24 percent. In addition, as the percentage of book losses increases, the positive impact of a fund’s book loss on donations becomes larger. By ruling out alternative explanations, we propose that the source of this negative wealth effect is spiritual insurance. Our findings identify a new channel linking financial-market losses to household behavior and provide a behavioral explanation for why donations need not fall in down markets.