Chapter 13: Saving behavior, economic and psychological approaches

Question 1

What are the 3 different types of saving according to Katona

Answer 1

(1) Discretionairy saving = type of saving that is of interest when studying explanations of saving (e.g. you put money intentionally in da bank)
(2) Contractual savings = a result of previous decisions, such as buying goods and services on credit. Think of it as downpayment on loans
(3) Residual saving = income that is simply not spent during a period and is therefore not the result of a decision, it is accidental saving

Question 2

Describe the economic and psychological approach on studying saving behavior (6)

Answer 2

Economic:

• The goal is to predict the behavior of the average person as good as possible
• Models based on simplifying assumptions such as homo economicus and rational agent

Psychologic

• Explanatory variables and methods
• Studying individual differences instead of the average person
• Focus on active decisions to save and/or saving intentions

Question 3

What is the theory of time preference in saving behavior?

Answer 3

A concept to explain the formation of interest rates. Someone’s time preference expresses his or her impatience to increase consumption in the present period.

Question 4

What is the main critique on the theory of time preference in saving behavior?

Answer 4

(1) It is simply not true that all factors that determine someone’s preference for immediate consumption can be expressed in a single variable.
If so, we would be equally impatient for furniture and food, which is def not the case

Question 5

What is the absolute income hypotheses?

Answer 5

Saving is a linear function of present income. If income rises, so will savings

Question 6

What is the relative income hypothesis in relation to saving behaviour?

Answer 6

The propensity to save is related to the relative position of consumers in the income distribution of his/her reference group (e.g., neighbors or colleagues). Ultimately, consumption is strongly influenced by comparison with others people’s consumption

Question 7

What is the permanent income theory regarding saving behaviour?

Answer 7

INdividuals are forward-looking, and saving is a function of future expected income and the individuals time preference rate

Question 8

What is the behavioral life-cycle hypothesis?

Answer 8

People may not act rational and consistent in deciding between present and future consumption due to a lack of self-control. People spend regular income more easily than a lump-sum

Question 9

Psychological approaches on saving: people’s expectations about the future (2)

Answer 9

(1) if people are optimistic and confident about their future economic situation, there more willing to spend money and to borrow, but not save
(2) If people are uncertain, they will develop tends to save more and borrow less

Question 10

What is the difference between time horizon and time preference?

Answer 10

(1) Time horizon = how far in the future do people think

(2) Time preference = How people value consumption in the present vs consumption in the future

Question 11

What can you tell about peoples attitudes towards saving and actual saving behavior (2)?

Answer 11

(1) Positive attitude towards saving means more saving

(2) People might have different attitudes towards saving in general and their own saving

Question 12

What are the 4 main motives for saving?

Answer 12

(1) Precautionairy - people save for emergencies
(2) People save for retirement
(3) People save for children and family needs
(4) People save for other purposes such as house buying or holidays

Question 13

Why can precautionary saving never be a predictor of actual saving?

Answer 13

Everybody says that precautionary saving is super important yet most of us do not save p

Question 14

What is the theory of buffer stock model and saving?

Answer 14

The precautionary motive of saving only motives those whom have not saved enough to meet their need for a financial buffer

Question 15

What can you say about big-5 and saving habits?

Answer 15

Constiouscness, emotional stability and introversion are positively related to saving

Question 16

Why are financial decisions difficult in nature and what is the effect on that on the general public’s financial literacy? (4)

Answer 16

• many people are unable to perform simple economic calculations
• many people do not understand basic economic concepts
• financial literacy links to planning and saving behavior
• Financial literate people are more likely to invest, less likely to borrow and less likely to have payment problems

Question 17

What is a long term recommendation for improving financial literacy?

Answer 17

include it in the school curriculum

Question 18

Why do many Americans not participate in 401K? (3)

Answer 18

The behavioral life-cycle hypothesis:

• Cutting on spending to save is experienced as loss
• Temptation to consume overrules self-control
• Procrastination/inertia prevents saving (status-quo bias)

Question 19

What is hyperbolic discounting?

Answer 19

People tend to favor immediate payoff rather than later payoffs, the tendency increases the closes both payoffs are

Example: someone prefers 50 today over 100 tomorrow, but not 50 over a week and 100 over a week + 1 day

Question 20

What does hyperbolic discounting have to do with pension savings?

Answer 20

People are more willing to save money for pension a year from now than right away

Question 21

What is het SMarT program in pension savings and what are effects of the SMarT program?

Answer 21

(1) People find it more attractive to save later than now (hyperbolic discounting)
increase in pension contributions when someone receives a pay raise. This avoids feelings of loss, thus becomes more easier to accept increases in pension contributions. It is a default participation

• 78% of those who were offered the program joined
• 80% remained through the 4th pay raise
  Average saving rate increases from 3.5 - 13.6% over the course of 40 months