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The Role of Savings Goals in the Prediction of Personal Spending. Johanna Peetz and Roger Buehler Wilfrid Laurier University. Peetz & Buehler (in press), PSPB. Spending predictions. Past research on spending

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the role of savings goals in the prediction of personal spending

The Role of Savings Goals in the Prediction of Personal Spending

Johanna Peetz and Roger Buehler

Wilfrid Laurier University

Peetz & Buehler (in press), PSPB

spending predictions
Spending predictions

Past research on spending

  • Spending behavior e.g., Furnham, 1999; Kidwell et al., 2003; Lee & Ariely, 2006; Vohs & Faber, 2007
  • Corporate forecastse.g., Flyvberg et al., 2009; Schwartz & Cohen, 1995

Past research on predictions

  • Predictions are often optimistically biased e.g., Armor & Taylor, 1998; Dunning, 2007
  • Time spent on projects is underestimated →”planning fallacy” e.g., Buehler et al., 1994, 2002; Kahneman & Tversky, 1979
goals and predictions
Goals and Predictions
  • Two theories of goals affecting predictions
    • Motivated reasoning (Kunda, 1990)
    • Desirability bias (Krizan & Windschitl, 2007)
  • Goals affecting behavior?
    • Increased commitment(Locke & Latham, 1990)
    • Corresponding plans(Gollwitzer, 1999)
  • Goals and intentions affect predictions more than behavior (Buehler et al., 1997; Epley & Dunning, 2000, 2006) e.g., donating blood (Koehler & Poon, 2006)
savings goals
Savings goals
  • Preference to minimize expenses and keep expenditures under control
  • Savings goals should have a greater impact on predicted than actual spending
    • Self-control(Faber & Vohs, 2004; Rabinovich & Webley, 2007)
    • Multiple competing goals
present research
Present Research

HYPOTHESES

  • People underestimate personal spending
  • Savings goals contribute to this bias
    • The more people want to save the more they predict to reduce their spending
    • But wanting to save money might not translate into behavior
study 1 is there a bias
Study 1 – Is there a bias?

“all expenses included except large sums that would occur only once a month, such as rent”

31 undergraduate students

TIME 1

Predicted spending in the next week

Recalled spending of past week

TIME 2

Recalled spending of past week: Actual Spending

Predicted spending in the next week

study 1 is there a bias1
Study 1 – Is there a bias?

140

120

*

*

100

*

Spending

80

in $

60

40

20

0

Past

Predicted

Actual

Predicted

(Week 1)

(Week 2)

(Week 2)

(Week 3)

study 2 the role of savings goals
Study 2 – The Role of Savings Goals

30 undergraduate students

TIME 1

Rated saving goals and other money attitudes

Predicted spending in the next week

DIARY

Every night, listed spending of past day: Σ7 days= Actual Spending

TIME 2

Recalled spending of past week

study 2 the role of savings goals1
Study 2 – The Role of Savings Goals

Spending

in $

140

120

**

100

80

60

40

20

0

Predicted

Actual

Remembered

study 2 the role of savings goals2
Study 2 – The Role of Savings Goals

Predicted Spending

Actual Spending

“Saving money is important to me”

-.38*

-.07

* p < .05

study 3 ruling out demand
Study 3 – Ruling out Demand

88 undergraduate students

TIME 1

Rated savings goals and other money attitudes

M = 48 days later

TIME 2

No reminder condition--

Goal reminder conditionRated savings goals

Vs.

Predicted spending in the next week

study 3 ruling out demand1
Study 3 – Ruling out Demand
  • Average predictions did not differ significantly by condition

Goal reminder condition

No reminder condition

Predicted Spending

Time 1Saving goals

-.32*

-.40*

Time 2Saving goals

-.37*

--

* p < .05

study 4 manipulating savings goals
Study 4 - Manipulating Savings Goals

56 undergraduate students

TIME 1

Strong Saving Goal

Vs.

Weak Saving Goal

People who save money are generally more successful in life.

e.g., Saving money is just one indicator of a future oriented approach to life, which is linked to career success.

People who spend money are generally more successful in life.

e.g., Spending money is just one indicator of a spontaneous approach to life, which is linked to career success.

Predicted spending in the next week

TIME 2

Recalled actual spending in the week

study 4 manipulating savings goals1
Study 4 - Manipulating Savings Goals

Spending

200

in $

180

160

**

140

120

100

80

60

40

20

0

StrongSaving Goal

WeakSaving Goal

instances outside savings goals study 5 spending money on friends
Instances outside savings goals:Study 5 -Spending money on friends

38 undergraduate students

TIME 1

Identified a friend’s birthday coming up in the next 2 month

Predicted spending for this birthday

Rated the reason for their prediction (7-point scales): Thoughts about saving goals Thoughts about feelings about the friend

Recalled usual spending for birthdaysRecalled past spending for this friend’s birthday

instances outside savings goals study 5 spending money on friends1
Instances outside savings goals:Study 5 - Spending money on friends

$

60

50

Usual

*

*

Past

40

Predicted

30

20

10

0

Birthday Spending

instances outside savings goals study 5 spending money on friends2
Instances outside savings goals:Study 5 - Spending money on friends

**

Compare to a separately collected sample predicting weekly spending:

conclusions and implications
Conclusions and Implications
  • People routinely underestimate future spending
    • Contributes to literature on money vs. time accountingLeclerc et al., 1995; Okada & Hoch, 2004; Soman, 2001
    • “Budget fallacy” similar to “Planning fallacy”
  • The goal to save money amplifies the optimistic spending bias
  • Poor predictions may lead to poor budgeting decisions

Ironically, those individuals who are most motivated to improve their finances, may generate the worst financial plans!

future directions and current studies
Future directions and current studies
  • Cognitive mechanisms
    • Knowing items (i.e., “unpacking”)
    • Knowing prices
  • Construal level
  • Different prediction objects
    • Monthly and daily time periods
    • Event spending
thank you

Thank you

Questions and Comments?