Encyclopedia of Gerontology and Population Aging

Living Edition
| Editors: Danan Gu, Matthew E. Dupre

Subjectively Measured Financial Resources

  • Łukasz JurekEmail author
Living reference work entry
DOI: https://doi.org/10.1007/978-3-319-69892-2_205-1

Synonyms

Definition

The financial situation may be assessed differently by individuals and may deliver a different level of satisfaction. For example, people who are objectively well-off may perceive their situation as bad, and vice versa, people with objectively low personal wealth may be satisfied with their situation. The way of perceiving one’s wealth is a complex matter determined by various factors (Joo and Grable 2004).

Overview

During the period since World War II, in psychology and economics prevailed a simplistic view of the association between financial resources and financial satisfaction. It stated that changes in economic welfare (e.g., income, wealth) indicate the same changes – regarding both direction and degree – in social welfare (e.g., financial satisfaction) (Easterlin 1974). Therefore, rich people were considered to be more satisfied than the poor, and it was also believed that growth in personal wealth causes (somewhere about) balanced growth in financial satisfaction. This assumption has recently been negated. First of all, changes in resources and satisfaction do not have to undergo in the same direction. According to relative standards theory, subjective assessment of the financial situation depends more on relative rather than absolute wealth. People do not perceive their situation in isolation from others but compare it to the situation in the reference group. Therefore, financial well-being is not being influenced only by possessed resources but also (in more considerable degree) by resources possessed by others or more precisely by the discrepancy between personal wealth and the common wealth. In his classic statement, Easterlin (1995) claimed that “Raising income of all, does not increase the happiness of all, because the positive effect of higher income on subjective well-being is offset by the negative effect of higher living level norms brought about by the growth in incomes generally” (p. 36). Therefore, it is possible that improvement in the financial situation of a person not only does not increase his or her satisfaction but even cause dissatisfaction, if this improvement is grossly smaller than overall in the reference group. Secondly, the degree of changes in both resources and satisfaction does not have to be equal. Arnold Schwarzenegger used to say: “Money does not make you happy. I now have $50 million, but I was as happy when I had $48 million.” This ironic statement refers to the law of diminishing marginal utility of wealth, according to which, as net worth increases (ceteris paribus), the marginal utility derived from each additional unit declines. So, if all else remains unchanged, the constant increase in wealth causes improvement in financial satisfaction but increasingly slowly.

Objectively Versus Subjectively Measured Financial Resources

There is no direct link between subjectively and objectively measured financial resources. People with similar personal wealth may perceive their situation differently – more or less positively. The way of subjective assessment is a complex matter and depends on many factors, such as personal characteristic (e.g., life circumstances, previous experience, material aspirations, value system), environmental circumstances (e.g., economic development, political stability, culture), reference points, and others.

Personal wealth may, but do not have to, reflect financial well-being. Older people may adopt different strategies for perceiving their situation (Burholt and Windle 2006). Objectively and subjectively measured financial resources may correspond to each other. Such convergence is described as “actual well-being” when both measures are regarded as good or as “deprivation,” when both of them are regarded as bad. However, feelings and facts may be contradictory. Such divergence is described as “dilemma of discontentment” when despite the objectively good financial condition, satisfaction is on a low level or as a “satisfaction paradox,” when the objectively bad financial condition goes hand in hand with a high level of satisfaction.

There are various psychological mechanisms based on the discrepancy between subjective assessment and objective facts. The dilemma of discontentment is closely related to dissonance that has root in unfavorable comparison. To assess the financial situation as good or bad, people usually need some reference point. They try to compare their actual situation with the previous stage of life or with situation among other people. In the case of relative poverty, even despite the objectively good or very good situation, the subjective assessment may be harmful.

Dissatisfaction may also be caused by other factors. Negative assessment may be associated with emotional strain and anxiety about the deterioration of the financial situation in the future. It is irrelevant whether this situation is currently good or even very good, because various risks typical to old age may radically ruin it in the future. Such risks are especially illness (medical costs), dependence (long-term care costs), or death of a spouse (reduce in income).

Satisfaction paradox, in turn, is closely related to the process of adaptation that occurs as a downward adjustment of both financial goals and comparison standards. People, as they are getting old, usually tend to adapt to circumstances which are beyond their control. Under various problems and limitations, they adjust down their material aspirations to the level that is possible to achieve (Solberg et al. 2002). As satisfaction depends on the extent to which resources fulfill one’s desires (Michalos 1985), thus on the ground of radically reduced standards, even minor financial advantages become a source of pleasure and satisfaction.

Financial Satisfaction Over the Life Cycle

Numerous studies have shown a positive correlation between age and financial satisfaction. Generally, people, as they are getting older, tend to be increased content with their resources. For example, about 85% of older Americans and Norwegians are satisfied or very satisfied with their financial situation, and that result is much higher than among non-older people (Hansen et al. 2008). Evidence of this pattern was also found in studies from other many countries. Unfortunately, as it was pointed out by Plagol (2011), most of those studies measure financial satisfaction, so they actually do not explain whether age-related differences are associated with age or reflect differences between birth cohorts.

There is no consensus as to whether this surprisingly high level of financial satisfaction among older people is a result of sound financial conditions or rather is associated with low material aspirations. Certainly, to some extent, it is a result of downward desires and expectations, as they are lower among older people than among young (Plagol 2011). On the other hand, a high level of satisfaction also reflects a truly good situation. It is not noticeable when income is being considered as a determinant of material conditions because it takes invert U-shape across the life course, so is much lower during retirement than during pick-earning midlife. However, considering other determinants, the situation gives much more reasons for optimism.

First of all, pension benefits from the public system, although usually much lower than wages, have many advantages. Among others, it is a trusted and stable source of income. They are valorized continuously, which keep real value over time and also are relatively resistant to turbulent economic changes. It is convenient for beneficiaries because it gives a sense of security and frees from uncertainty. Secondly, older people do not need to pay expenses for children, because their offspring (if they have some) are already grown and economically independent. If they support relatives, they do it voluntarily, which can bring additional satisfaction and even cause a sense of superiority toward the young in need. Thirdly, budgets of households headed by older people are usually debt-free. Older people already paid off their long-term financial obligations, such as mortgage or student loans.

Moreover, older adults, as they are at the last stage of life, do not need to save for the future. Earlier both repayment of debts and saving contributions absorbed a large part of the salary, which in turn significantly limited consumption. Release from those required payments reduces emotional strain, gives a sense of independence, and thus positively influences financial well-being. Fourthly, due to the accumulation of wealth, older people are the wealthiest part of the population. Their net worth reaches peak that gives a positive comparison to the previous stages of life and the others. Besides, accumulated wealth lowers emotional strain and gives a sense of security, assets provide protection in case of financial hardship. Moreover, finally, older adults are characterized by a relatively highest level of financial capability (Xiao et al. 2015). They usually demonstrate (among others) higher levels of financial literacy and more desirable financial behaviors.

Summary and Future Directions of Research

A subjective financial assessment is a topic of growing importance in social sciences to measure the financial well-being, as well as in behavioral economics to recognize and to influence the household’s financial behavior. Nevertheless, it is still insufficiently identified research field. Psychology provides more and more knowledge about biases in judgment and perception, but there is still a lack of a coherent theory showing changes in financial satisfaction over the life cycle.

Cross-References

References

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Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  1. 1.Wrocław University of EconomicsWrocławPoland

Section editors and affiliations

  • Andrzej Klimczuk
    • 1
  1. 1.Independent ResearcherBialystokPoland