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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. Past research on spending

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The Role of Savings Goals in the Prediction of Personal Spending

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

  2. 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

  3. 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)

  4. 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

  5. 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

  6. 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

  7. 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)

  8. 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

  9. Study 2 – The Role of Savings Goals Spending in $ 140 120 ** 100 80 60 40 20 0 Predicted Actual Remembered

  10. Study 2 – The Role of Savings Goals Predicted Spending Actual Spending “Saving money is important to me” -.38* -.07 * p < .05

  11. 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

  12. 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

  13. 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

  14. Study 4 - Manipulating Savings Goals Spending 200 in $ 180 160 ** 140 120 100 80 60 40 20 0 StrongSaving Goal WeakSaving Goal

  15. 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

  16. Instances outside savings goals:Study 5 - Spending money on friends $ 60 50 Usual * * Past 40 Predicted 30 20 10 0 Birthday Spending

  17. Instances outside savings goals:Study 5 - Spending money on friends ** Compare to a separately collected sample predicting weekly spending:

  18. 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!

  19. 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

  20. Thank you Questions and Comments?

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