{"id":13467,"date":"2017-10-31T05:49:45","date_gmt":"2017-10-31T05:49:45","guid":{"rendered":"https:\/\/www.revoscience.com\/en\/?p=13467"},"modified":"2017-10-31T05:49:45","modified_gmt":"2017-10-31T05:49:45","slug":"impatience-guides-financial-behavior","status":"publish","type":"post","link":"https:\/\/www.revoscience.com\/en\/impatience-guides-financial-behavior\/","title":{"rendered":"How impatience guides financial behavior"},"content":{"rendered":"

Long-term states of mind can affect short-term financial decisions.<\/strong><\/em><\/span><\/p>\n

\"\"
A new study suggests that long-term states of mind about whether people consider themselves spenders or savers can affect short-term financial decisions.
Image: Chelsea Turner\/MIT<\/figcaption><\/figure>\n

CAMBRIDGE, Mass. —\u00a0Imagine you are receiving a refund payment from the federal government. Are you going to spend it right away or save the money? Is that decision based on your short-term finances? Or does it hinge on whether you identify yourself as a \u201cspender\u201d or a \u201csaver\u201d more generally?<\/span><\/p>\n

A new study by an MIT economist sheds more light on the quirks of people\u2019s actions in such cases and suggests that, in addition to immediate financial needs, persistent behavioral characteristics play a key role in even short-term pocketbook decisions.<\/span><\/p>\n

The study examines the 2008 economic stimulus payments the U.S. federal government sent to households across the nation. The study\u2019s rather nuanced findings indicate that while people do \u201csmooth\u201d their consumption by spending or saving money based on their own liquidity \u2014 as canonical economic theory holds \u2014 some longer-term factors are at play as well.<\/span><\/p>\n

For starters, other things being equal, lower historical incomes, not just short-term fluctuations in income, match a greater tendency to spend money right away. Beyond that, people who describe themselves as habitual \u201cspenders\u201d will plow through newfound money more quickly. This adds credence to the idea that larger behavioral tendencies, not just rational calculations, help drive financial decisions.<\/span><\/p>\n

So while material needs matter, self-assessments about being \u201csavers\u201d or \u201cspenders\u201d do \u201ca phenomenally good job of separating those who save from those who don\u2019t,\u201d says Jonathan Parker, the MIT economist who authored the study. \u201cIt\u2019s a question about impatience. Are you someone who is impatient? If you get \u2018yes\u2019 for that answer, those are the spenders.\u201d<\/span><\/p>\n

The study bears on larger matters of both personal finance and tax policy, since the distribution of tax refunds by income bracket, for example, is tied to their overall economic impact. Like other research, the study shows that people lacking considerable income or wealth are more likely to spend such refunds more quickly.<\/span><\/p>\n

\u201cIt does suggest that lower-income, lower-liquidity folks tend to tie their consumer demand very much to income,\u201d says Parker, the Robert C. Merton Professor of Finance at the MIT Sloan School of Management.<\/span><\/p>\n

The paper, \u201cWhy Don\u2019t Households Smooth Consumption? Evidence from a $25 Million Experiment<\/a>,\u201d appears this month in the latest issue of the\u00a0American Economic Journal: Macroeconomics<\/em>.<\/span><\/p>\n

Spend now: Three times as much, in fact<\/strong><\/span><\/p>\n

To conduct the study, Parker took advantage of a quirk in the 2008 stimulus. The federal government sent the payments to households on a schedule determined by the last two digits of the recipients\u2019 social security number, something that is unrelated to financial circumstances or personal characteristics. Therefore the timing of the receipt of payments \u2014 and the subsequent spending that resulted \u2014 was effectively random.<\/span><\/p>\n

All told, the study encompasses about 29,000 households actively participating in the Nielsen Consumer Panel, an ongoing survey that measures spending habits and household characteristics across the U.S. The average payment was around $900 per household.<\/span><\/p>\n

On one level, the research reinforces the idea that basic financial need drives a certain portion of the household spending. On average, household spending on household goods rose by 10 percent the first week after the payment arrived, and by roughly 5 percent over the first four weeks. But households with low liquidity, which comprised 36 percent of those surveyed, spent more than three times as much of the money in the first week and more than twice as much of the payment in the first four weeks.<\/span><\/p>\n

\u201cThere are people who have persistently lower incomes and lower liquidity, who spend this money when it arrives,\u201d Parker says. Historical income performance was also bound up in this response. As Parker writes in the paper, \u201clow income in 2006 is as good as\u201d liquidity status at the same time, when it comes to \u201cseparating the households who spent from those who did not.\u201d<\/span><\/p>\n

Meanwhile, self-conception and long-run spending habits also influenced outcomes considerably, adding a wrinkle to existing models of household behavior in these circumstances. Parker\u2019s research found that those who describe themselves as people who prefer to \u201cspend now\u201d rather than \u201csave for the future\u201d had a threefold increase in spending.\u00a0<\/span><\/p>\n

\u201cI think it suggests to me there is a lot of heterogeneity on the preference side and the behavior side,\u201d Parker says. \u201cDespite the first-order importance of the financial variable in separating people, there\u2019s also a lot of evidence that preferences matter a lot.\u201d<\/span><\/p>\n

Or, as he adds, \u201cmy findings are consistent with a reasonably simple model in which people with different degrees of impatience try to maintain a stable standard of living but face limits on low-cost borrowing. For the range of differences in behavior that I uncover, so-called behavioral modeling assumptions are second order.\u201d<\/span><\/p>\n

Research implications<\/strong><\/span><\/p>\n

The income distribution of any federal income tax cut or refund is an inherently political matter, and the outcome of current efforts in Washington to pass new tax legislation is uncertain. But regardless of policy outcomes, economists can continue to adjust their own models of consumer behavior based on new empirical findings.<\/span><\/p>\n

Such models can also better inform the scoring of tax changes, as well as other models of policy, such as those used by the Federal Reserve to characterize how households respond to movements in interest rates.<\/span><\/p>\n

In this vein, Parker\u2019s study joins a growing body of literature (including some of his own previous work) that modifies the most streamlined models in which people smooth out consumption in anticipation of drops or increases in income \u2014 and instead accounts for the bumps and jolts in spending that the data reveals.<\/span><\/p>\n

\u201cWe think that people try to maintain a reasonably stable standard of living,\u201d Parker says. And yet, he notes, people \u201cdo an awful lot of spending when money shows up.\u201d<\/span><\/p>\n

In research terms, Parker says, one contribution of the study is to \u201ccleanly identify and connect differences in spending behavior across people, to measurable differences in people,\u201d such as their self-conceptions as \u201cspenders\u201d or \u201csavers.\u201d He hopes his work will pave the way for improved mathematical models of \u201cconsumption and savings and borrowing decisions that incorporate, in a simple yet rigorous way, these differences in behavior.\u201d<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Long-term states of mind can affect short-term financial decisions. CAMBRIDGE, Mass. —\u00a0Imagine you are receiving a refund payment from the federal government. Are you going to spend it right away or save the money? Is that decision based on your short-term finances? Or does it hinge on whether you identify yourself as a \u201cspender\u201d or […]<\/p>\n","protected":false},"author":6,"featured_media":13468,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[34,17],"tags":[],"class_list":["post-13467","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economics","category-research"],"featured_image_urls":{"full":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",639,426,false],"thumbnail":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0-150x150.jpg",150,150,true],"medium":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0-300x200.jpg",300,200,true],"medium_large":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",639,426,false],"large":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",639,426,false],"1536x1536":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",639,426,false],"2048x2048":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",639,426,false],"ultp_layout_landscape_large":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",639,426,false],"ultp_layout_landscape":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",639,426,false],"ultp_layout_portrait":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",600,400,false],"ultp_layout_square":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",600,400,false],"newspaper-x-single-post":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",639,426,false],"newspaper-x-recent-post-big":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",540,360,false],"newspaper-x-recent-post-list-image":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",95,63,false],"web-stories-poster-portrait":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",639,426,false],"web-stories-publisher-logo":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",96,64,false],"web-stories-thumbnail":["https:\/\/www.revoscience.com\/en\/wp-content\/uploads\/2017\/10\/MIT-Household-Consumption_0.jpg",150,100,false]},"author_info":{"info":["Amrita Tuladhar"]},"category_info":"Economics<\/a> Research<\/a>","tag_info":"Research","comment_count":"0","_links":{"self":[{"href":"https:\/\/www.revoscience.com\/en\/wp-json\/wp\/v2\/posts\/13467","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.revoscience.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.revoscience.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.revoscience.com\/en\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/www.revoscience.com\/en\/wp-json\/wp\/v2\/comments?post=13467"}],"version-history":[{"count":0,"href":"https:\/\/www.revoscience.com\/en\/wp-json\/wp\/v2\/posts\/13467\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.revoscience.com\/en\/wp-json\/wp\/v2\/media\/13468"}],"wp:attachment":[{"href":"https:\/\/www.revoscience.com\/en\/wp-json\/wp\/v2\/media?parent=13467"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.revoscience.com\/en\/wp-json\/wp\/v2\/categories?post=13467"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.revoscience.com\/en\/wp-json\/wp\/v2\/tags?post=13467"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}