Behavioral Traits Can Influence Financial Decisions
New research suggests that impatience and similar behavioral traits play a role in how people manage their money.
Imagine you are receiving a sizable tax refund from the federal government. Are you going to spend it right away or save the money? Is the decision based on your short-term finances? Or does it hinge on whether you are a “spender” or a “saver?”
In a new study, researchers reviewed individual decisions following the U.S. federal government’s 2008 economic stimulus payments. At this time, many households received a substantial check from the U.S. federal government.
The study’s rather nuanced findings indicate that while people do “smooth” their consumption by spending or saving money based on their own liquidity as traditional economic theory would predict, some longer-term factors are at play as well.
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.
For others, people who describe themselves as habitual “spenders” will use the money more quickly. Researchers believe this pattern supports the contention that larger behavioral tendencies, not just rational calculations, help drive financial decisions.
Self-assessments about being “savers” or “spenders” do “a phenomenally good job of separating those who save from those who don’t,” said Dr. Jonathan Parker, an economist at the Massachusetts Institute of Technology who authored the study.
“It’s a question about impatience. Are you someone who is impatient? If you get ‘yes’ for that answer, those are the spenders.”
Like other research, the study shows that people lacking considerable income or wealth are more likely to spend such refunds more quickly. “It does suggest that lower-income, lower-liquidity folks tend to tie their consumer demand very much to income,” Parker said.
The paper appears in the American Economic Journal: Macroeconomics.
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’ social security number, something unrelated to financial circumstances or personal characteristics.
Therefore the timing of the receipt of payments — and the subsequent spending that resulted — was effectively random.
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.
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 five 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.
“There are people who have persistently lower incomes and lower liquidity, who spend this money when it arrives,” Parker said.
Historical income performance was also bound up in this response. As Parker writes in the paper, “low income in 2006 is as good as” liquidity status at the same time, when it comes to “separating the households who spent from those who did not.”
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’s research found that those who describe themselves as people who prefer to “spend now” rather than “save for the future” had a threefold increase in spending.
“I think it suggests to me there is a lot of heterogeneity on the preference side and the behavior side,” Parker said. “Despite the first-order importance of the financial variable in separating people, there’s also a lot of evidence that preferences matter a lot.”
Or, as he added, “my 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.”
The study joins a growing body of literature that attempts to explain financial behavior when money becomes available.
“We think that people try to maintain a reasonably stable standard of living,” Parker says. And yet, he said, people “do an awful lot of spending when money shows up.”
In research terms, Parker said, one contribution of the study is to “cleanly identify and connect differences in spending behavior across people, to measurable differences in people,” such as their self-conceptions as “spenders” or “savers.”
He hopes his work will pave the way for improved mathematical models of “consumption and savings and borrowing decisions that incorporate, in a simple yet rigorous way, these differences in behavior.”
Nauert PhD, R. (2018). Behavioral Traits Can Influence Financial Decisions. Psych Central. Retrieved on September 23, 2020, from https://psychcentral.com/news/2017/11/01/behavioral-characteristics-influence-financial-decisions/128178.html