Rational gamblers: Gen Z, financial nihilism and the great wealth transfer

Recent US college grads with $94,000 in debt are buying crypto and betting on prediction markets. Priced out of housing and with stagnant wages, Gen Z adults (aged 18 to 27) have done the math and the calculations say the traditional system isn't working for them.

In 1990, the median American home cost 3.2 times the median household income. Today it costs 5 times the median income, and for someone aged 20-34, closer to 8 times their annual salary.

In the US, the median wage for a bachelor's degree holder, when adjusted for inflation, has barely moved from $58,138 in 1990 to $60,000 today. The generation's unemployment rate sits at 8.3%, which is double the national average. Although younger workers historically experience higher unemployment, today half of recent grads are underemployed and entry level jobs have declined by 35% in recent years.

People in this generation also carry more personal debt than any other – $94,101 on average – and 46% of Gen Z workers have already withdrawn from their retirement savings. The main reason for 42% of them was to pay down debt.

These Gen Zers couldn’t find a chapter for their situation in the conventional financial playbook, so they started writing their own.

The phrase "financial nihilism" describes the sense that the economic system no longer rewards prudence or long-term planning. It is shorthand for a generation's apparently self-destructive relationship with money, which includes crypto bets, prediction markets and retirement accounts raided to pay off credit cards.

A recent University of Chicago and Northwestern University study offers a more precise frame. This research shows that, as someone’s perceived probability of homeownership falls, their behaviour often shifts. They consume more relative to their personal wealth and they also take a measurable turn toward riskier investments.

This shows up in the numbers. Crypto is held by 42% of Gen Z investors – nearly four times the 11% who hold a retirement account. Almost one in five investors under 30 surveyed in 2022 held nothing but cryptocurrency. Some estimates show prediction markets’ trading volume has quadrupled in the past few years, with nearly a third of Gen Z investors participating in them or considering it.

These numbers are consequential because Gen Z is becoming the largest cohort on earth, set to reach roughly 30% of the global population over the next 10 years. What happens to an economy when the largest generation is betting on assets – cryptocurrencies and prediction markets – that aren’t the ones the system was built around?

Standard monetary policy assumes a particular kind of household: one with a mortgage that responds to interest rates, has savings in traditional markets and enough of a financial stake in the conventional economy to change behaviour when rates move. But the spread of financial nihilism means policy-makers risk misinterpreting household behaviour, with direct consequences for how monetary policy reaches the broader economy.

Historically, the central bank pulls a monetary policy lever and households are expected to react optimally to interest rate hikes and drops. With a growing share of the population increasingly holding no mortgage to refinance and routing its savings into assets that monetary policy wasn't designed to touch, however, the lever will stop working as well.

With Gen Z’s aggregate income — $9 trillion in 2023 — projected to reach $74 trillion by 2040, this is no longer a demographic quirk, but a question of the future effectiveness of traditional monetary policy.

The so-called great wealth transfer is the standard rebuttal to these concerns. Baby boomers (those currently in their 60s and 70s) hold $78.6 trillion or 51.8% of all wealth in the US. An estimated $68 to $84 trillion is expected to pass to spouses and younger generations over the next two decades. This story implies that Gen Z's difficulties are temporary, the correction is built into the system and the intergenerational ledger will balance itself out.

It won't. Not for most people and not in the way that’s generally expected. The wealthiest 10th of households will receive 56% of all intergenerational transfers. The bottom half will receive 8%. Remove the top 10% of Americans from the calculation entirely and the median inheritance for the remaining 90% lands at close to zero.

For the vast majority of the generation this narrative is invoked to reassure, the great wealth transfer is a story about other people's money. As the minority who benefit invest in real estate and other traditional assets, prices may be driven up even further. The already unattainable market becomes even more so for many Gen Zers.

What matters most is not that most of Gen Z won't receive a meaningful inheritance, it’s what happens to their behaviour and to that of markets when wealth inequality widens. When the primary barrier to homeownership is a down payment that increasingly arrives via parental transfer, the generation splits.

A minority receives the equity injection, holds the appreciating asset and gains access to the on-ramp to compounding returns that the traditional financial playbook was designed to deliver. They can afford to wait.

The other 90% have no such cushion. As their own wages barely move and house prices keep climbing, the exacerbated inequality may further incentivize them to find some alternative route to the financial finish line. The gap between winners and losers widens, and the path to financial success feels even more like a game.

While the conventional read of the great wealth transfer is that it will lift Gen Z, the more likely outcome is that it will formalize a split between those for whom the traditional path remains open and those for whom it doesn't. The second group keeps gambling – and, without a new chapter in the conventional financial playbook, the rational case for doing so will only grow.

Against the backdrop of vast wealth inequality, stagnant real wages and soaring house prices, people need clear and accessible guidance to help them meet their near- and long-term financial needs now more than ever.

Financial education alone cannot reprice a house or close a wage gap, however. Monetary policy must also account for a generation increasingly locked outside of the traditional asset system. And regulation must keep pace with the markets this generation is using to try to build wealth.

Financial education, policy-making and regulation must all resonate with Gen Z's economic realities if wealth-building is to become less of a gamble.