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)
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)
Some background from Economics
• Saving is an area where Economists have
made an explicit appeal to psychology to
explain behaviour: debt and borrowing have
been of less interest - they have just seen as
the opposite of saving.
• Keynes was not only a great economist, he
was also a reasonable psychologist: and his
list of 8 motives for saving has stood the
test of time (only one has been added)
 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 lifespan. 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 …..
Schematic diagram of ‘hump’ saving
50
40
30
Spe nding
20
Incom e
10
0
Saving motives across the life-span
• Some psychological data that are relevant to
these economic ideas come from the Dutch
socio-economic panel
• This shows that being prepared for
emergencies (having a ‘buffer’) is indeed
the most important motive for saving at
nearly all ages
Note: The
relative
unimportance
of saving for
old age
probably
reflects the
quality of
pension
provision in
Holland
What Economic Psychologists say
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.
Katona’s contribution
• Pointed out that an individual’s definition of saving
differed from that of an economist - in particular drew
distinction between discretionary and contractual saving
• Discretionary = an active decision to save during the
current accounting period: Contractual = a decision made
previously (e.g. to enter a pension plan that involves
regular payments)
• Another useful distinction is between involuntary and
voluntary saving - involuntary saving comes about when
there is no active decision to save
• Katona noted that, year by year, people plan to save more
than they actually do
Saving involves self-control - which is difficult!
• Basic fact: animals and children (and some adults), when
given a choice between a reward that is available
immediately and one that is available with some delay tend
to choose the small immediate reward
• This preference is not, in itself, irrational - a number of
factors make current consumption objectively more
attractive than saving (death, risk of inflation, risk of
default etc).
• But the extent of the preference defies rational analysis normal adults say that they would prefer £5 now to £10 in
two months - which could only be rational if the rate of
inflation were several thousand percent
• So we combat this by developing techniques for selfcontrol (e.g. pre-commitment, money-management
techniques)
Saving and expectations about the future
• People have a tendency to be over-optimistic in a wide
variety of domains (e.g. students over-estimate their postgraduation spending power). If this is true for expectations
about future income, saving will be too low and borrowing
too high
• BUT the very few studies that have been carried out (on
Dutch households) suggest that people under-estimate
their future incomes
• SO it may be better to think of people as using optimism
(or pessimism) as a strategy, rather than being optimistic
per se. Optimistic expectations about when one will finish
a project may act as a motivator - pessimistic expectations
about future income may lead to good money management
Thaler - the concept of mental accounts
• Thaler proposes that people have a number of mental
accounts that operate independently of each other
• Money in different mental accounts is spent differently:
propensity to spend is highest in the ‘current income MA’
and lowest in the ‘asset MA’
• This means that people may borrow to buy a car whilst
they have savings - the bank will ensure that they repay the
loan and this keeps their savings intact
• The idea of mental accounts, coupled with the notion that
the individual is an organisation containing a far-sighted
planner and a myopic doer, explains quite a lot of the
financial behaviour seen.
Some recent studies
• Debt - a panel study in the Netherlands
(Webley and Nyhus, 2001)
• Why do people save? - a study in the UK
(Canova, Manganelli and Webley, 2002)
• Individual differences and saving (Daniels
and Webley, 2000)
• Survey study of saving in UK and Italy
(Webley and Burlando 2002)
Debt study
• Steady stream of recent research on debt but it is very
static (only gives a snap-shot) and based on mail surveys
with very low response rates
• Need to be clear about distinction between debt, default
and borrowing.
• Borrowing is planned and intended (note that mortgages
are not seen as debts but as savings by most people)
• Debt is an obligation that a person is unable or unwilling to
discharge
• Default - simply not paying money owed
• Here focus is on debt
• Assume that there are two routes to debt
(a) the personality route where relevant enduring
dispositions (time orientation, lack of self-control), which
have been fostered by particular parenting styles, lead
people into debt (b) the rational route - if people
experience what they see as a temporary drop in income, or
a temporary increase in income, they may decide to run up
(temporary) debts
• Used data from three waves of the CentER panel
(from1994, 1995, 1996). This is a representative sample of
the Dutch public. Individuals complete large numbers of
questionnaires over computers so there is a vast amount of
information available on them.
• Measure of debt was based on whether people were in
arrears, had bank debt, reported being in debt, had
numerous credit arrangements
Results
• Descriptive findings same as previous studies - debtors
were younger, had lower income, rented accommodation,
had more children, had less unfavourable attitudes towards
debt
• Psychological variables add to our ability to predict debt.
There are 7 predictors: Income, Age, No of children,
Presence of partner, attitude to debt, obesity, use of money
management techniques, self-control
• Many differences between never debtors and mild debtors:
• Debtors had more variation in income, higher 5-year
income expectations, more income uncertainty, low life
expectancy (the rational route) and were less
conscientious and had less self-control (the personality
route)
How far is debt a short term problem?
• Of the “stayers” (those in the panel for all 3 years), 66
were in debt in 1994. One-third stayed in debt for the next
two years, one-third have got out and stayed out of debt
• Chronic debtors have lower incomes, less self-control,
shorter time horizons
• For 5 psychological variables looked at, the correlations
between debt status in 1994 and psychological variables in
1996 were higher than psychological variables in 1994 and
debt status in 1996. So differences in psychological
variables may be a consequence rather than a cause of debt
- e.g. obesity may be a result of comfort eating
Debt status in 1994 and 1995
1995
NonMild
Debtors
debtors debtors
1329
58
49
1994
NonDebtors
Mild
58
Debtors
Debtors 56
27
9
15
49
Why do people save?
• A total of 141 British adults answered a mailquestionnaire. 97 participants (69%) stated that they
intended to save during the next 12 months.
• Those intending to save had to provide 4 reasons why they
wanted to save, then explain why these are important, and
then asked to give further justifications.
• There were no significant differences between savers and
non-savers concerning sex, age, marital status, education,
occupation, type of accommodation, dependant children,
and source of income.
• Savers had a higher overall income than non-savers, were
more positive about the economic situation of the UK and
are more optimistic.
11
10
Selfgratification
Selfesteem
6
7
Autonomy
5
8
Household
6
To avoid
debt
6
7
Security
15
7
5
6
6
20
16
6
8
Speculation
Old age /
Illness
5
10
26
5
9
Retirement
Money
availabity
Purchases
Holidays /
Hobbies
5
Precaution
Saving Goals
• The placing of goals on the vertical axis follows the
relative ordering implied by the abstractness ratio.
“Self-esteem” and “Self-gratification” are the highestorder goals; “Holidays / Hobbies” and “Purchases” are
the lowest-order goals. Arrows go from goals that
function as sources of motivation to goals that serve an
intermediary or end-state objective.
• 3 general orientations can be discerned. One of these
deals with ways of avoiding debt and of achieving a
certain security in life. The second is reflected in the
desire for self-gratification, which can be reached by
means of holidays etc. The third focuses on old age. For
these respondents, saving for retirement is important to
guarantee gratification.. The 3 super-ordinate goals are
also linked: security leading to autonomy, self-esteem
and self-gratification are reciprocally connected.
Individual differences and 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)
Results
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.
DO psychological factors improve our
ability to predict saving? YES
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, selfcontrol, 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
IS household saving behaviour best explained
using data from both household members? YES
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
Explaining cross-national differences in saving
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.
Cross-national questionnaire study of savings
• Study tried to shed some light on the causes of the
international differences in savings through a consideration
of motivations for saving, income expectations, reference
group membership and trust in government.
• Questionnaires covered all of these issues plus financial
planning. Five different measures of saving were used.
• Questionnaires distributed in Bristol, Exeter, Turin, Asti,
n=347.
Cross-national differences in independent variables.
• Compared to those in the UK those in the Italian sample
were (i) more inclined to want to save as much as possible
(ii) had a longer time horizon (mode is 5-10 years for IT,
next couple of years for UK), and (iii) found it easier to
control their spending. Italians save more than UK sample
(on all saving measures). The importance of different
reasons for saving was similar though it is clear that
medical care and children’s education are more important
saving motives for the Italians and that saving for future
consumption (e.g. holidays) is more important for the
English.
• The preferred size of a buffer is much higher in the Italian
sample (over £34,000, as opposed to a mean of £8,962 in
the UK sample).
Results
• The three psychological variables (time horizon, planning,
control) are all related to saving. So too was general trust in
government (those who trust more save more), income, age and
perceived financial status compared to reference group.
• To examine whether these relationships were independent, the
data were analysed using multiple regression. A hierarchical form
of analysis was used, which looked at the effects of a series of
groups of variables in turn. The variables were entered into the
analysis in the order; economic, demographic, social
psychological, psychological. This analysis shows that whilst
economic factors matter (a higher income leads to more saving),
so too do social psychological and psychological factors. The
impact of reference groups is particularly notable
• The best set of variables for predicting saving behaviour included
income, housing, social comparison, self-control, planning and
time horizon.
THE END
Unless you want some policy
implications ...
Some policy implications
• Saving is hard and getting into debt is easy. Policy needs to
be based on a firm understanding of why people save (and
why they get into debt)
• Education matters. What evidence there is suggests that
‘learning to wait’ begins in childhood. So - from a long term
perspective - we need to foster parenting and School
practices that encourage saving
• The main reason for saving in the UK seems to be ultimately - hedonistic (e.g. “to have the holiday of a
lifetime”. People in the UK have trust in the government and
still believe (unlike most Italians) that ‘the system’ (the state,
their employee) will provide them with the pensions they are
entitled to. So for Brits, saving for old age is well important.
So one way - oddly- to encourage UK citizens to save would
be to undermine their faith in the system.
Some policy implications (continued)
• Believing that you are financially better off than members
of your reference group is a good predictor of saving. But
most Brits (strangely) believe that they are worse off than
people like them. This belief may be open to manipulation
• Those who have longer planning horizons save more (and
are in debt less). Thinking more about the future is also
something that can be encouraged
• There is probably value in disseminating good (simple and
effective) money management techniques. Most people are
surprisingly bad at managing money!