Picture
Dr. Geller's assertion that money anxiety should be viewed as behavioral economics phenomenon more so than a psychological condition was featured on Dr. Laura.

Stressed about money? You are perfectly normal. Seven of ten people reported being stressed about money in a study by the American Psychological Association, which shows that stress and anxiety over money a normative condition.

Money anxiety is a survival instinct that warns us a financial danger. It is the same instinct that told our ancestors to run when they faced a tiger in the woods. In modern society, our survival instincts are centered on money, which enables us to obtain life's necessities such as food, shelter and clothing

The complete article is available at this link.





 
 
Picture
A 5 percent reduction in personal consumption, brought by acts of terrorism, is enough to push the U.S. economy into a recession. 

Acts of terror promote economic uncertainty and financial anxiety in people, who instinctively react by reducing spending.  A 5 percent reduction in personal consumption, which makes up nearly 70 percent of the U.S. economy, will decrease Gross Domestic Product (GDP) by   3.5 percent or negative 1.4 percent based on the 2015 third quarter GDP of 2.1 percent.

There are two aspects to terrorism’s impact on the economy.  The first is the immediate impact on commerce right after a terror attack.  The November terror attack in Paris de facto paralyzed commerce in parts of Paris, and later on in Brussels, for a few days.  Repeated economic disruptions like these can have severe economic impact on local and national economies.  

The second economic implication of terror acts is in elevating financial anxiety in the aftermath of every terror attack.  The terror act of September 11, 2001 immediately increased the level of money anxiety of people in the U.S.  In the month of the attack, September, the Money Anxiety Index jumped 5.1 points from 56.9 in the previous month and continued to climb up nearly 21 points when it peaked at 77.6 on December of 2001.

Research conducted and published by Money Anxiety shows that fear and uncertainty are the main triggers of financial anxiety.  When the level of money anxiety increases, people tend to react instinctively by reducing their spending and increasing their savings.  This is a normal reaction of survival and self preservation.  Conversely, people spend when safe.


 
 
Picture
Carolyn Ellis, Features Editor for Advisor Magazine, talked with Dr. Dan Geller about Money Anxiety.

Dr. Dan Geller is an expert in behavioral finance and the author of the popular and insightful book Money Anxiety. He frequently speaks to business and academic audiences on how money anxiety affects consumers’ personal finances. We talked with Dr. Geller about how financial professionals can improve sales and be more responsive to clients by understanding money anxiety and the Money Anxiety Index.

L&HA: Why is the concept of money anxiety important?

DG: Knowing how people really make financial decisions will guide financial professionals to the right product at the right time so you can help your clients solve their problems.

My book Money Anxiety explains the research and factors of what we call Behavioralogy, a matrix of predictable consumer financial behaviors. In Money Anxiety I cover the six financial behaviors we all exhibit and what’s appropriate to do in each one of them.

L&HA: What, really, is money anxiety?

DG: Money anxiety is a biological survival mechanism. True money anxiety originates in the reptilian or earliest part of the brain. Our ancestors, when there was uncertainty due to the elements, behaved with food and wood the same way that we behave today with money. There are people who suffer from general anxiety disorder which can include money, but that’s not money anxiety.

L&HA: How prevalent is money anxiety?

DG: The latest study from the American Psychological Association confirms that money anxiety is common and normal. Their study issued in February 2015 shows that 7 out of 10 people reported money as their highest concern and highest factor for stress and anxiety. In the social sciences, anytime you get 70 percent or 7 out of 10 people, that’s a normal level.

L&HA: We know money anxiety exits but how do you measure it?

DG: In statistics money anxiety is what we call a latent variable. With advanced statistics there are ways to measure it indirectly by measuring the impact that money anxiety has on behaviors like saving and spending. We use the same principle used by physicists to measure behavior of sub-atomic particles. Our model is also predictive, so we can know in advance where spending and savings are headed.

L&HA: Your work uses scientific methods to account for instinctive behaviors.

DG: We have developed the Money Anxiety Index to demonstrate and predict how the level of money anxiety affects consumers’ financial behavior. We have data for the Money Anxiety Index going back 50 years. Companies in the financial sector license this data to do statistical analyses.

Money Anxiety Index is the only index that is objective. Indices like consumer sentiment and financial confidence rely on questionnaire-based surveys and are subjective. People are asked, “How do you feel about the economy?” The Money Anxiety Index relies on what people do with their money. We monitor financial activity, not what people say. It’s much more reliable.

L&HA: How can agents and advisors use this information to provide the right products and services?

DG: Products that are more attractive to consumers at an elevated level of money anxiety have less risk and are more liquid. Let’s say someone has an insurance policy on the house or other assets with a deductible of $10,000. When money anxiety goes up, sensitivity to this potential loss gets greater. There is an opportunity to approach clients to lower their risk by paying a higher premium to lower the deductible.

L&HA: Is the Money Anxiety Index applicable to all clients?

DG: The Money Anxiety Index is universal. In developing the Money Anxiety Index, we measured the financial behavior of people, regardless of demographics or psychographics. Everyone cuts spending when money anxiety increases, and they increase their savings. The proportions can be different in different sub-groups. People of means might cut spending by buying a $50,000 car instead of a $100,000 car.

L&HA: Are insurance carriers working with your data?

DG: We license the Money Anxiety Index data throughout the financial sector including to banks, brokerage firms and research companies for analysis. They are very interested in how consumer financial behavior and money anxiety impact the industry and products. For example, a good time to promote life insurance is when money anxiety is elevated. Life insurance provides for the survival of the family unit. Also when money anxiety is elevated, people tend to prefer liquid assets. Life insurance with cash value that the policyholder can use if needed is even more attractive. The Money Anxiety Index is a proven predictor of financial confidence.

L&HA: Looking back on 2015, how you would describe the year?

DG: The trend shows that people are less financially anxious now than they were in early 2015. However, in the last few months the Money Anxiety Index has been flat. That shows consumers are confused. In first quarter 2015 GDP was almost zero. Second quarter growth was tremendous, at close to 4 percent. The third quarter was somewhere in between. With volatility like this people are sitting on the fence.

L&HA: Are there other factors like the upcoming presidential election that have an impact?

DG: Money anxiety is really all about money. Yes, elections and politics might have some impact but economic factors like employment and wages are the real drivers.

L&HA: What are your expectations for 2016?

DG: I think we are headed into an improved economy here in the U.S. I don’t predict a tremendous jump; I foresee slow and gradual improvement. Globally, it’s a different picture.

L&HA: Can financial planners help their clients overcome money anxiety?

DG: Yes they can, by alleviating some of their clients’ financial concerns. Remember, money anxiety is not a clinical condition. Having insurance and knowing that even if something were to happen the exposure is minimal will help to alleviate money anxiety. Having savings is helpful, too. When the Money Anxiety Index is elevated, it’s good to advise clients to stay more conservative. Our research has proven that people hate to lose more than they love to win. They spend when they feel safe and save when they are scared. ◊


 
 
Picture
In the third quarter of this year, consumers nearly doubled the pace of spending and reduced the pace of savings by half as their level of money anxiety subsided compared to last year.

The amount of consumer spending in the third quarter of this year increased by 3.0 percent compared to an increase of only 1.7 percent during the same time period last year according to the latest personal consumption data released by the U.S. Department of Commerce.

Conversely, the pace of bank savings decreased by half in the third quarter of this year up only 0.6 percent compared to an increase of 1.2 percent during the same period last year according to the latest data reported by the FDIC.

The increase in the amount of spending, and at the same time, the decrease in the amount of savings, is prompted by a lower level of financial anxiety. The Money Anxiety Index, which measures the level of financial stress and anxiety among consumers, decreased by 7.4 index points between the two periods. In the third quarter of this year, the Money Anxiety Index stood at 64.5 compared to 71.9 during the same time last year. 


 
 
Picture
Immediately after the September 11 attack, the Money Anxiety Index jumped 5.1 points and continued to climb up 21 points in the aftermath of the terror attack.

Analysis by the Money Anxiety Index shows that the terror act of September 11, 2001 immediately increased the level of money anxiety of people in the U.S.  In the month of the attack, September, the Money Anxiety Index jumped 5.1 points from 56.9 in the previous month and continued to climb up nearly 21 points when it peaked at 77.6 on December of 2001.

Research conducted and published by Money Anxiety shows that fear and uncertainty are the main triggers of financial anxiety.  When the level of money anxiety increases, people tend to react instinctively by reducing their spending and increasing their savings.  This reaction originates in the reptilian part of the brain, which oversees survival and self preservation.

The level of money anxiety is the catalyst between analytical thinking and instinctive reaction.  Research in behavioral economics shows that when the level of money anxiety is low, people tend to use their frontal cortex for analytical thinking, also known as “system 2.”  Conversely, when the level of money anxiety is elevated, people tend to react more instinctively, using their reptilian brain or so called “system 1.”

The Money Anxiety Index measures the level of consumers' financial worry and stress based on their spending and savings pattern. Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s. 

The Money Anxiety Index functions as an early-warning system to shifts in the economy, allowing financial advsors to react in time to changes in the economic cycle. The Money Anxiety Index Is highly preidictive. It predicted the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007.



 
 
Picture
While consumers reported lower financial confidence in July, consumers actually increased their retail spending by 0.6 percent.  Clearly, what consumers said is contrary to what they actually did with their money.

The two leading consumer confidence indices reported a decline in financial confidence in July of this year.  However, the decline in financial confidence consumers reported to confidence surveys is the complete opposite to their financial behavior, which was higher retail spending in July.

The Thomson Reuters/University of Michigan Index of Consumer Sentiment reported a decline of 3.0 points to 93.1 in July 2015, and the Conference Board Consumer Confidence Index dropped 8.9 points to 90.9 in July of this year.  However, according to the U.S. Department of Commerce, retail sales increased 0.6 percent in July. 

The disparity between what people say in response to confidence surveys and the way they actually behave with their money is a known phenomenon in behavioral finance.  One of the reasons consumer confidence indices were late to report on the looming recession in 2007 was because consumers remained optimistic in their reporting to surveys, but acted contrary in real life.

A true measurement of financial confidence among consumers is achieved by measuring what consumers actually do with their money (objective) rather than ask them how they feel, which is subjective.  The Money Anxiety Index measures consumer financial confidence by observing actual financial behavior.  Contrary to the survey-based consumer confidence indices, the Money Anxiety Index reported a 0.1 drop in the level of financial anxiety, thus higher financial confidence in July, which explains the increase in retail sales.

The Money Anxiety Index is produced by Dr. Dan Geller, a behavioral finance scientist and the author of the book Money Anxiety.  The index measures the level of consumers’ financial worry and stress based on their spending and savings pattern.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s.  

 
 
Picture
The sluggish economy and the never-ending recovery are not about lack of money – they are about lack of confidence that tomorrow will be better than today.  This is the moral of a true story about the state of mind of consumers, and why money itself can’t revive the economy.

I was having a discussion with a reader of my book Money Anxiety.  The reader is a man of means who lives very comfortably.  “I read your book” he told me, “and I want to tell you a true story that supports your assertion that what’s ailing the economy today is not necessarily lack of money.” 

“I was walking downtown on my way to buy a big-screen TV”, he started the story.  As I was about to enter the store, I heard the news about the collapse of Lehman Brothers – this was in September of 2008.  I remember standing there in front of the store thinking to myself: I have money; I can walk right into the store and get any big-screen TV, but do I want to make this purchase not knowing how the economy is going to look like tomorrow?”

 What did you end up doing? I asked him.  “I turned around and walked back to my office” he replied.  “What amazed me the most”, he continued, “is that it was not about the money – I could easily afford it – it was about the way I felt about the economy.”  Now multiply this story by millions or tenth of millions of consumers, who can afford spending more but are holding back because they “just don’t feel right about the economy.” 

This is the reason the current economic recovery is the longest and most persistent at least since the Great Depression.  Despite trillions of dollars in QE money and near zero Fed funds interest rate for over 6 years, the economy is not yet back to where it was pre recession.  Yet, the amount of money sitting in banks and credit unions accounts is at an all time high - $12 trillion.

The cautionary level of consumer spending is evident in the Money Anxiety Index, which measures the level of consumer financial uncertainty and anxiety.  On the eve of the Great Recession, in November of 2007, the Money Anxiety Index stood at 58.6 compared to 64.6 in May of this year.  Despite a time period of over 7 years, the level of financial anxiety is not yet back to where it was pre recession.  The slow and gradual improvement in the level of consumer financial confidence points to the growing role emotions, such as financial uncertainty and anxiety, have in economic recoveries.

“We can no longer assume that if people have more money they will spend more” says Dr. Dan Geller, the developer of the Money Anxiety Index and the author of the book Money Anxiety, “we must also consider the soft side of economics represented by consumers’ financial uncertainty and anxiety.”  
Dr. Dan Geller is a behavioral finance scientist, who pioneered the research on the link between consumers’ financial fear, their instinctive or analytical decisions and the economy.  

The Money Anxiety Index measures the level of consumers’ financial worry and stress associated with their spending and savings pattern.  The Money Anxiety Index is highly predictive.  It signaled the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s.  


 
 
Picture
Consumers change their spending habits right away when their level of financial anxiety increases, but wait a month before they express their action when responding to consumer confidence surveys.   These are the findings from the latest study measuring the link between financial confidence and consumer spending conducted by the Money Anxiety Index.

The study measured the lag time between two types of financial confidence indices, one based on action and the other on surveys, and the level of Personal Consumption Expenditure (PCE) over the past 5 years.  The analysis shows that when the Money Anxiety Index increases, consumers respond immediately by reducing spending, and when their level of money anxiety decreased, consumers resumed higher spending in the same month.  The Money Anxiety Index consists of 

Conversely, when responding to consumer confidence surveys, such as the Thomson Reuters/University of Michigan Index, the lag time is one month after consumers have already acted.  This means that when consumers report lower confidence level in the survey, they have already decreased their spending in the prior month, and when they report higher confidence level, their spending increased the month before.  The raw data for this analysis is available upon request from drgeller@moneyanxiety.com  
 
The Money Anxiety Index measures the level of consumers’ financial worry and stress associated with their spending and savings pattern.  The Money Anxiety Index is highly predictive.  It signaled the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s.  

Dr. Dan Geller is a behavioral finance scientist and the author of the best-selling book Money Anxiety, which explores the financial behavior of consumers.  Dr. Geller speaks about behavioral finance to groups and at conferences and is frequently featured on national TV and radio programs. 

 
 
Picture
The idiom shop ‘til you drop is true but the drop is not from exhaustion, rather it is in financial confidence.

Financial confidence is a major driver in the shopping habit of consumers.  When financial confidence increases, consumers spend more money, and when their financial confidence drops, they spend less.  These are the findings from the latest study conducted by the Money Anxiety Index on the link between financial confidence and consumer consumption.

The study shows very strong correlation (.612) between the level of consumers’ financial anxiety and the level of consumer consumption.  Moreover, the study shows that changes in the financial anxiety of people explain 37 percent of the changes in the level of spending, which means that there is a very strong and significant causal relation between the two events.

Also, there is no lag time between changes in financial anxiety and spending.  Analysis shows high cross correlation (.597) between financial anxiety and consumer spending at the zero lag time, meaning that the two events occur within the same month. Thus, when consumers feel a change in their level of financial confidence, they react right away.  

The study consists of monthly data of Personal Consumption Expenditure (PCE) from January 2000 to December of 2014, published by the U.S. Department of Commerce, and monthly data of the Money Anxiety Index over the same time period.  
 
The Money Anxiety Index measures the level of consumers’ financial worry and stress based on their spending and savings pattern.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s.  The Money Anxiety Index is highly predictive.  It signaled the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007.   

Dr. Dan Geller is a behavioral finance scientist exploring the link between the level of financial anxiety and the savings and spending habits of consumers.  In his book, Money Anxiety, Dr. Geller uncovers the mystery of the financial mind, explaining why we hate to lose more than we love to win and why we spend when safe and save when scared.


 
 
Picture
Change in financial confidence instantly impacts consumers’ decision to increase or decrease spending.

When consumers feel more financially confident, they increase consumption instantly, and when they are financially anxious, consumers reduce spending right away.  These are the findings from the latest study conducted by the Money Anxiety Index.

The study shows that in the past 15 years, consumer consumption increased in the same month that the Money Anxiety Index decreased, reflecting higher level of financial confidence.   Conversely, when the level of consumer financial confidence decreased, consumer consumption decreased as well with no lag time between the two events.

The study included monthly data of Personal Consumption Expenditure (PCE) published by the U.S. Department of Commerce, and monthly data of the Money Anxiety Index over the same time period.  The analysis shows that the lag time between the two events had the highest cross correlation (.597) at zero lag time, meaning within the same month of occurrence.
 
The Money Anxiety Index measures the level of consumers’ financial worry and stress based on their spending and savings pattern.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s.  The Money Anxiety Index is highly predictive.  It signaled the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007.   

Dr. Dan Geller is a behavioral finance scientist exploring the link between the level of financial anxiety and the savings and spending habits of consumers.  In his book, Money Anxiety, Dr. Geller uncovers the mystery of the financial mind, explaining why we hate to lose more than we love to win and why we spend when safe and save when scared.