Study shows that the higher the effort in earning money, the lower the willingness of consumers to take risks with their income.

According to studies, consumers hold the belief that individuals who work harder for their money possess higher incomes, are more financially literate, and are more open to accepting financial risks that are sensible.

Similarly, findings from national survey data used by policymakers to assess the relationship between effortful earning and financial risk-taking also reveals a positive correlation between the two.

However, recent research from the University of Notre Dame takes a completely different approach and indicates the opposite. According to the study, the harder a consumer works, the less willing they are to risk their earnings through investments or elsewhere. In other words, when comparing two people, the one who works harder will be more tolerant of risk, but when looking at a single person, those who work harder are less tolerant of risk, and those who don’t work as hard are more inclined to take risks.

The research, titled “Working Hard for Money Decreases Risk Tolerance,” is forthcoming in the Journal of Consumer Psychology with Christopher Bechler as the lead author. Mr. Bechler is an assistant professor of marketing in Notre Dame’s Mendoza College of Business. The team also comprises Samina Lutfeali, Szu-chi Huang, and Joshua Morris from Stanford University.

“Consumers feel greater psychological ownership over their earnings when they work hard for them, which makes them value these earnings more and be more averse to losing them,” Bechler stated. “So, they choose less risky investments and invest less.”

The team conducted four experiments and one supplemental study using an incentive-aligned paradigm that captured the causal effect of effortful earning on risk-taking. Participants exerted effort to obtain money within a microcosmic financial cycle over three to six periods (months). They accomplished tasks like pressing the “S” key on their keyboard tens or hundreds of times and transcribing Dutch poems to earn money. After each period, participants were presented with an opportunity to risk their earnings, which was mostly an investment opportunity.

Moving forward, the negative relationship between effort and risk may become increasingly influential, says Bechler. People have always worked hard to earn money, but even more so in the midst of the COVID-19 pandemic, persistent high inflation, low wage growth, and other economic factors.

“The smaller the temporal gap between effortful earnings and spending/investment decisions, the more influential our effect will be,” Bechler noted. “Individuals who work for tips frequently receive daily compensation, and technological advancements are reducing this time gap even further, allowing workers to be paid immediately after work and invest their earnings instantly. Our effect will be more significant in such instances.”

The findings of this research provide support for interventions that automate the accumulation of assets by directly transferring income into an investment plan.

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