Behavioral Life-Cycle of Saving and Spending in Finance
Finance for
Normal People
Chapter 9: Behavioral life-cycle of saving and
spending
Behavioral life-cycle of saving and spending
Portfolio theory is about the
production
of
portfolios
Life-cycle theory is about
accumulation
of assets into
portfolios and
decumulation
from them
Behavioral life-cycle of saving and spending
1.
Standard life-cycle theory
Our sole reason for saving is spending
We wants “smoothed” spending during our life-cycle
(More precisely, we want smoothed marginal utility of
consumption and leisure during our life-cycle)
Behavioral life-cycle of saving and spending
1.
Behavioral life-cycle theory
Our reasons for saving consist of wants for the full range of
utilitarian, expressive, and emotional benefits of wealth
(Wealth
owning
, rather than spending, also yields expressive
and emotional benefits)
Behavioral life-cycle of saving and spending
2. Standard life-cycle theory
People need no tools and no help in resolving conflicts
between wants for saving and spending
Behavioral life-cycle of saving and spending
2. Behavioral life-cycle theory
People reconcile the conflict between wants by:
Framing
Mental accounting
Self-control
Public policy also helps reconcile conflicts between wants
Behavioral life-cycle of saving and spending
The spending-sources and spending-uses pyramids
Behavioral life-cycle of saving and spending
Figure 9-1a – Spending-sources pyramid
Behavioral life-cycle of saving and spending
Figure 9-1b – Spending-uses pyramid
Behavioral life-cycle of saving and spending
Self-control
Wants for spending can overwhelm wants for saving when
self-control is weak
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Genetics account for approximately 1/3 of differences in
saving behavior
The effect of parents on their children’s saving behavior is
strongest when children are in their 20s but disappears by
middle age
Behavioral life-cycle of saving and spending
Personal Saving Orientation (PSO) is a measure of saving
habit
People with high PSO tend to agree with statements such as:
“Putting money into personal savings is a habit for me”
“I usually save money without having a specific goal in
mind”
People with high PSO find it difficult to break their saving
habit
Behavioral life-cycle of saving and spending
Self-control
Conscientiousness is closely associated with self-control
Poverty undermines self-control
Self-control is bolstered by commitment
Behavioral life-cycle of saving and spending
Evidence about standard and behavioral life-cycle
theories
The financial advising industry
Government saving and spending plans
Corporate saving and spending plans
Distinctions between capital and income
Behavioral life-cycle of saving and spending
Prescriptions of standard and behavioral life-cycle
theories
Social security
Defined-benefit pension plans
Defined-contribution retirement saving plans
Annuities (and the annuity puzzle)
Information about sustainable withdrawals
Behavioral life-cycle of saving and spending
Financial literacy
Financial comprehension
Financial behavior
Behavioral life-cycle of saving and spending
Standard and behavioral life-cycle theories in public
policy
Libertarian hands-off
Libertarian-paternalistic nudges (Voluntary)
Paternalistic shoves (Mandatory)
Behavioral life-cycle of saving and spending
Retirement income for the wealthy, middle-income,
and poor
Wealthy
Steady-middle
Precarious middle (low-earners and high-spenders)
Poor
Explore the behavioral aspects of saving and spending in the life-cycle theory of finance. Learn how individuals reconcile conflicts between saving and spending desires through mental accounting, self-control, and framing. Discover the various sources and uses of spending, including luxury items and discretionary expenses, within the context of wealth accumulation.
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Presentation Transcript
Finance for Normal People Chapter 9: Behavioral life-cycle of saving and spending
Behavioral life-cycle of saving and spending Portfolio theory is about the production of portfolios Life-cycle theory is about accumulation of assets into portfolios and decumulation from them
Behavioral life-cycle of saving and spending 1. Standard life-cycle theory Our sole reason for saving is spending We wants smoothed spending during our life-cycle (More precisely, we want smoothed marginal utility of consumption and leisure during our life-cycle)
Behavioral life-cycle of saving and spending 1. Behavioral life-cycle theory Our reasons for saving consist of wants for the full range of utilitarian, expressive, and emotional benefits of wealth (Wealth owning, rather than spending, also yields expressive and emotional benefits)
Behavioral life-cycle of saving and spending 2. Standard life-cycle theory People need no tools and no help in resolving conflicts between wants for saving and spending
Behavioral life-cycle of saving and spending 2. Behavioral life-cycle theory People reconcile the conflict between wants by: Framing Mental accounting Self-control Public policy also helps reconcile conflicts between wants
Behavioral life-cycle of saving and spending The spending-sources and spending-uses pyramids
Behavioral life-cycle of saving and spending Figure 9-1a Spending-sources pyramid
Behavioral life-cycle of saving and spending Figure 9-1b Spending-uses pyramid Major luxury and status items, such as luxury cars and jewelry Discretionary items such as recreation and travel Necessities, such as food and shelter
Behavioral life-cycle of saving and spending Self-control Wants for spending can overwhelm wants for saving when self-control is weak
Behavioral life-cycle of saving and spending Genetics account for approximately 1/3 of differences in saving behavior The effect of parents on their children s saving behavior is strongest when children are in their 20s but disappears by middle age
Behavioral life-cycle of saving and spending Personal Saving Orientation (PSO) is a measure of saving habit People with high PSO tend to agree with statements such as: Putting money into personal savings is a habit for me I usually save money without having a specific goal in mind People with high PSO find it difficult to break their saving habit
Behavioral life-cycle of saving and spending Self-control Conscientiousness is closely associated with self-control Poverty undermines self-control Self-control is bolstered by commitment
Behavioral life-cycle of saving and spending Evidence about standard and behavioral life-cycle theories The financial advising industry Government saving and spending plans Corporate saving and spending plans Distinctions between capital and income
Behavioral life-cycle of saving and spending Prescriptions of standard and behavioral life-cycle theories Social security Defined-benefit pension plans Defined-contribution retirement saving plans Annuities (and the annuity puzzle) Information about sustainable withdrawals
Behavioral life-cycle of saving and spending Financial literacy Financial comprehension Financial behavior
Behavioral life-cycle of saving and spending Standard and behavioral life-cycle theories in public policy Libertarian hands-off Libertarian-paternalistic nudges (Voluntary) Paternalistic shoves (Mandatory)
Behavioral life-cycle of saving and spending Retirement income for the wealthy, middle-income, and poor Wealthy Steady-middle Precarious middle (low-earners and high-spenders) Poor
