New study findings show that Individuals that work hard for their money are less likely to take financial risks. The recent study reveals that as individuals work harder, they become less willing to take risks with their earnings, including investments and purchases.
Previous studies have indicated that people believe those who work hard for their money tend to have higher incomes, greater financial literacy, and are more comfortable taking calculated financial risks. Moreover, national survey data used by policymakers also supports a positive connection between effortful earning and financial risk-taking, implying that those who are prudent with their money are more likely to prosper.
However, this financial risks study shows a different perspective at the individual level. While comparing two different people, the person who works harder may exhibit more risk tolerance. Yet, when evaluating an individual, that same person may be less tolerant of risk when they have worked hard and more tolerant of risk when they have not exerted much effort.
Lead author Christopher Bechler, an assistant professor of marketing at Notre Dame’s Mendoza College of Business, explains that consumers feel a stronger psychological attachment to earnings they have worked hard for, making them value those earnings more and be more cautious about losing them. Consequently, they tend to opt for less risky investments and invest less overall.
Reimagining investment strategies in a changing economic landscape
The researchers conducted four experiments and one supplemental study using a unique, incentive-aligned approach to understand the causal effect of effortful earning on risk aversion. In these studies, participants exerted effort to earn money through various tasks over a three to six-month period, and afterward, they had the opportunity to risk their earnings on different investment opportunities.
Despite riskier options potentially offering greater expected returns, the study revealed that individuals with more effortful earnings tended to be less inclined to take on risk.
The researchers believe that this negative relationship between effort and risk aversion could have significant implications, especially considering the current economic challenges posed by the COVID-19 pandemic, persistent high inflation, and low wage growth.
Prof. Bechler highlights short temporal gaps between earning and spending/investing decisions in some industries. With technological advancements allowing for immediate payment after work, it minimizes the gap between earning and spending/investing. As a result, the researchers’ findings become even more influential.
To address this and prevent hard work from undermining investment decisions, the study supports automating income into investment plans.
The study is published in the Journal of Consumer Psychology.