The Economic Psychology of Saving and Debt. Paul Webley Talk to Economic Psychology seminar group, Autumn 2002. Outline of talk. 1. Some background (Keynes, Katona, Thaler etc) 2. Two routes into problem debt (a panel study in Holland)
Talk to Economic Psychology seminar group, Autumn 2002
1. Some background (Keynes, Katona, Thaler etc)
2. Two routes into problem debt (a panel study in Holland)
3. What lies behind saving motives? (a questionnaire study in the UK)
4. Saving and individual differences (a questionnaire study in the UK)
5. Saving, individual differences and reference groups (a questionnaire study in the UK and Italy)
To build up a reserve against unforeseen contingencies
(the precautionary motive)
To provide for the anticipated future relationship between income and needs (the life-cycle motive)
To enjoy interest (the inter-temporal substitution motive) [K said this was unimportant]
To enjoy a gradually improving expenditure (the improvement motive)
To enjoy a sense of independence and power to do things (the independence motive)
To secure a masse de manoeuvre to carry out speculative or business projects (the enterprise motive)
To bequeath a fortune (the bequest motive)
To satisfy pure miserliness (the avarice motive)
Most economic theories of saving concentrate on motive 2 (the most obvious reason for saving today is to spend tomorrow)
Modern theories e.g. Carroll’s buffer-stock model also focus on motive 1 (the need to have a reserve for emergencies)
Either way, just about all economic models of saving assume optimisation.or utility maximisation over the life-span. The life-cycle hypothesis says that saving at any stage of a person’s life-cycle can be predicted from his current income and wealth, expectation of future income and life expectancy, by finding the stream of consumption that will maximise utility.So you’d expect something like this …..
Note: The relative unimportance of saving for old age probably reflects the quality of pension provision in Holland
By contrast economic psychologists have suggested
(i) Saving is not a unitary phenomenom (Katona makes distinctions between discretionary and contractual saving and between voluntary and involuntary saving)
(ii) most people have a self-control problem - saving is actually difficult to do
(iii) saving involves forming expectations about the future (especially future income) - which is not straightforward
(iv) the assumption of fungibility (that all wealth is equivalent) is wrong. Thaler has proposed that people have different mental accounts, and based on this, a behavioural life-cycle model of saving.
Purpose of this study is:
1. to explore the relationship between individual differences and saving
2. to look at the relative contribution of economic and psychological factors (do psychological factors improve our ability to predict saving?)
3. to look at the whether household saving behaviour is best explained using psychological data from both household members or just from the main decision maker
1. Questionnaires posted to 530 household (1060 individuals) in Exeter and Plymouth. Household selected from electoral register which comprised two individuals with same name and opposite gender [note: biases the sample towards conventional households] . Each member of couple asked to complete questionnaire
2. Completed questionnaires returned by 110 households (195 individuals)
3. Questionnaire covered
(i) demographic and economic variables (income, number of children, occupation, sex, age, housing)
(ii) psychological variables (impulsiveness, Consideration of Future Consequences scale, self-control, time preference, economic socialisation)
(iii) measures of saving (total household savings, regular saving)
What IS the relationship between individual differences and saving?
1. The exact pattern of the relationship depends on whether one is looking at total or regular savings, and using data from just decision makers or both household members
2. time preferences, self-control etc all associated with saving in the expected direction (e.g. more impatient, less saving) except that higher impulsiveness was associated with more saving
3. Economic socialisation variables were not important - but only measured with two very simple items.
1. Hierarchical regression used with variables entered in order socio-economic, individual. diffs, economic socialisation
2. Total savings best predicted by age and time preference
3. Regular saving best predicted by financial situation, self-control, CFC scale, impatience
4. Note that this fits with Lunt and Livingstone findings that for total savings, socio-economic variables were more important and that for recurrent savings, psychological variables were more important
1. There was a positive correlation between the scores of spouses on most psychological variables (impulsiveness .45, CFC .24, delay of gratification, .36) though not all. Correlations were higher for those couples who had been married longer
2. Using psychological information from both couples improves our ability to predict both total savings and regular saving. Using only psychological variables, the R2 are
Total savings Amount saved regularly
Data from both spouses .32 .43
Data from decision maker .23 .29
1. There are very large differences in the savings rates across countries. Japan has a very high saving rate, Italy quite a high rate and the UK and USA relatively low rates. Why?
2. Economists’ attempts to explain these differences using economic indicators (growth rates, social security systems, tax incentives etc) have been largely unsuccessful
3. May they stem from cultural differences between countries? Carroll et al show that there are differences in immigrants saving behaviour by country of origin but that these do not match up with the differences in national savings rates.
Unless you want some policy implications ...