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Purse Strings Versus Heart Strings: Do Emotions Affect Economic Behaviour?

Author

Listed:
  • Viet Hoang Nguyen

    (Melbourne Institute: Applied Economic & Social Research, University of Melbourne)

  • Edda Claus

    (Wilfrid Laurier University and CAMA)

Abstract

Do emotions affect economic behavior? We identify two transmission channels of negative emotions to consumption, one predicted by economists and one predicted by psychologists. We use self-reported financial stress and mental distress to identify negative emotions and use current and expected spending to capture consumption behavior. We find that the psychology transmission channel dominates when budget constraints are not binding. As a coping mechanism, consumers increase consumption to regulate the negative emotions caused by stress. Our results are in line with appraisal models of emotions where the perceived cause of the emotion rather than its pleasantness drives behavior.

Suggested Citation

  • Viet Hoang Nguyen & Edda Claus, 2024. "Purse Strings Versus Heart Strings: Do Emotions Affect Economic Behaviour?," Melbourne Institute Working Paper Series wp2024n16, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    • Handle: RePEc:iae:iaewps:wp2024n16
    as

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    File URL: https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0012/5193759/wp2024n16.pdf
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    References listed on IDEAS

    as
    1. Sydney C. Ludvigson, 2004. "Consumer Confidence and Consumer Spending," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 29-50, Spring.
    2. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, vol. 84(5), pages 1397-1408, December.
    3. Makridis, Christos A., 2022. "The social transmission of economic sentiment on consumption," European Economic Review, Elsevier, vol. 148(C).
    4. French, Declan & Vigne, Samuel, 2019. "The causes and consequences of household financial strain: A systematic review," International Review of Financial Analysis, Elsevier, vol. 62(C), pages 150-156.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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