Knowing When to Spend: Unintended Financial Consequences of Earmarking to Encourage Savings

Savers and Borrowers: Strategies of Personal Financial Management

Saving and borrowing are traditionally and stereotypically thought of as opposites, with different motivations and consequences. Through a questionnaire survey of economic position, practices, and attitudes, the present paper examined the relation between saving and borrowing among British respondents. While saving and borrowing were found to be determined by different economic, social, and psychological factors, they did not describe mutually exclusive strategies of financial management. Saving regularly could also be distinguished from having savings. In all, six strategies were identified (combining saving or not saving, borrowing or not borrowing, and having or not having savings). Each combination was found to have specific discriminating characteristics. Savers and borrowers were found to have different psychological motivations, seeing debt either as a failure or as a normal part of everyday life. Many people retained savings or carried on saving at the same time as having debts: they were found to feel more in control and optimistic about their financial position than those who had debts but no savings. A further group had neither debts nor savings: they adopted an inflexible approach to financial management. Each group of people with different financial management strategies was illustrated by a case study.

When Motivation is against Debtors' Best Interest: The Illusion of Goal Progress in Credit Card Debt Repayment

The authors explore the illusion of goal progress by consumers who own multiple credit cards and pay off their debt balances to facilitate the achievement of their subgoal rather than the superordinate goal of being debt-free. The first experiment shows that debtors use their savings toward the credit card debt they can pay off entirely or substantially, even if it is associated with the smallest balance and the lowest annual percentage rate rather than toward the debt with the highest annual percentage rate. The second experiment reveals that when the income available to pay down the debt is in the form of effortless money (i.e., windfall or reward money) as opposed to hard-earned savings, the tendency to allocate money toward the smallest credit card debt is exacerbated. However, people tend to pay their debt more rationally when the number of debt accounts increases. Finally, the third experiment shows that credit card debt repayment decisions depend on the nature of the debt (hedonic vs. utilitarian) and the timing of consumption benefits (past vs. future). The article concludes with a discussion of managerial and public policy implications.

Temporal Reframing and Participation in a Savings Program: A Field Experiment

This study explores whether framing savings in more or less granular formats can increase sign-ups for a recurring deposit program in a FinTech environment. , A growing number of American workers are now freelancers and thus, responsible for their own retirement savings, yet they face psychological hurdles that hamper them from saving enough money for the long term. Although prior theory-derived interventions have been successful in addressing some of these obstacles, encouraging participation in saving programs is a challenging endeavor for policy makers and consumers alike. In a field setting, we test whether framing savings in more or less granular formats (for example, saving daily versus monthly) can encourage continued saving behavior through increasing the take up of a recurring deposit program. Among thousands of new users of a financial technology app, we find that framing deposits in daily amounts as opposed to monthly amounts quadruples the number of consumers who enroll. Furthermore, framing deposits in more granular terms reduced the participation gap between lower- and higher-income consumers: three times as many consumers in the highest rather than lowest income bracket participated in the program when it was framed as a $150 monthly deposit, but this difference in participation was eliminated when deposits were framed as $5 per day.

On shifting consumers from high‐interest to low‐interest debt

Abstract In the United States, many consumers are increasingly accumulating debt, much of which is harmful and expensive. Prior research has devoted a great deal of attention to understanding why consumers generally get into debt and the strategies they can use to repay existing debts. While this work has furthered the agenda of helping consumers reduce or eliminate their overall debt balances, it has failed to emphasize the fact that for many consumers, debt may be unavoidable. This article aims to promote research that addresses not only overall debt reduction but also the need for consumers to shift from more to less costly types of debt. By shedding light on the psychological reasons why consumers may naturally gravitate toward more costly forms of debt when less costly ones may be available, we offer a novel perspective on why consumers get into and stay in debt longer than they should. This new angle has the potential to spur on further research into the ways consumers can use debt more effectively and less expensively in service of the overarching goal of debt reduction.

What Would You Do with $500? Spending Responses to Gains, Losses, News, and Loans

Abstract We use survey questions about spending in hypothetical scenarios to investigate features of propensities to consume that are useful for distinguishing between consumption theories. We find that (1) responses to unanticipated gains are vastly heterogeneous (either zero or substantially positive); (2) responses increase in the size of the gain, driven by the extensive margin of spending adjustments; (3) responses to losses are much larger and more widespread than responses to gains; and (4) even those with large responses to gains do not respond to news about future gains. These four findings suggest that limited access to disposable resources, and frictions in adjusting consumption, are important determinants of consumption behaviour. We also find that (5) households do not respond to the offer of a one-year interest-free loan, suggesting that this is not a consequence of short-term credit constraints; and (6) people do cut spending in response to news about future losses, suggesting that neither is this a consequence of myopia. A calibrated precautionary savings model with utility costs of changing consumption, and a sufficient fraction of low-wealth households, can account for these features of propensities to consume on both the extensive and intensive margins.

Consumer Financial Decision Making: Where We’ve Been and Where We’re Going

When making purchasing decisions, consumers consider their available budget and determine what payment method they will use as well as how they will finance the purchase. Consumers must also plan for long-term consumption by considering short- and long-term savings objectives, taking into account how they will invest money saved, as well as how they will borrow needed money and repay outstanding loans. This issue of the Journal of Association of Consumer Research explores financial decision making, which we define as the accumulation and use of resources across time, as reflected by consumers’ behavior and choices.

Cash versus Debit Card: The Role of Budget Control

Due to the financial crisis, an increasing number of households face financial problems. This may lead to an increasing need for monitoring spending and budgets. We demonstrate that both cash and the debit card are perceived as helpful in this respect. We show that, on average, consumers responsible for financial decision making within a household find cash and the debit card equally helpful for monitoring their household finances. Individuals differ in major respects, however. In particular, low earners and the liquidity‐constrained prefer cash as a budgeting tool. Finally, we present evidence that at an aggregated level, such preferences strongly affect consumer payment behavior. These findings suggest that the substitution of cash by cards may slow down because of the financial crisis.

Malleable Mental Accounting: The Effect of Flexibility on the Justification of Attractive Spending and Consumption Decisions

Mental accounts are often characterized as self‐control devices that consumers employ to prevent excess spending and consumption. However, under certain conditions of ambiguity, the mental accounting process is malleable; that is, consumers have flexibility in assigning expenses to different mental accounts. We demonstrate how consumers flexibly classify expenses, or construct accounts, to justify spending. An expense that can be assigned to more than one account (i.e., an ambiguous expense) is more likely to be incurred than an unambiguous expense that is constrained either by existing budgets or by previously constructed accounts. We explore the justification processes that underlie these results and their implications for mental accounts as self‐control devices.

Co-holding behaviour: unlocking the puzzle

This article seeks to explain why households decide to simultaneously hold both credit and savings products. Beyond the arguments of ignorance or behavioural biases commonly used in the literature,...

Do people like financial nudges?

Do people like financial nudges? To answer that question we conducted a pre-registered survey presenting people with 36 hypothetical scenarios describing financial interventions. We varied levels of transparency (i.e., explaining how the interventions worked), framing (interventions framed in terms of spending, or saving), and ‘System’ (interventions could target either System 1 or System 2). Participants were a random sample of 2,100 people drawn from a representative Australian population. All financial interventions were tested across six dependent variables: approval, benefit, ethics, manipulation, the likelihood of use, as well as the likelihood of use if the intervention were to be proposed by a bank. Results indicate that people generally approve of financial interventions, rating them as neutral to positive across all dependent variables (except for manipulation, which was reverse coded). We find effects of framing and System. People have strong and significant preferences for System 2 interventions, and interventions framed in terms of savings. Transparency was not found to have a significant impact on how people rate financial interventions. Financial interventions continue to be rated positive, regardless of the messenger. Looking at demographics, we find that participants who were female, younger, living in metro areas and earning higher incomes were most likely to favor financial interventions, and this effect is especially strong for those aged under 45. We discuss the implications for these results as applied to the financial sector.

Misunderstanding Savings Growth: Implications for Retirement Savings Behavior

People systematically underestimate exponential growth. This article illustrates this phenomenon, its implications, and some potential interventions in the context of saving for retirement, where savings grow exponentially over long periods of time. Experiment 1 shows that a majority of participants expect savings over 40 years to grow linearly rather than exponentially, leading them to grossly underestimate their account balance at retirement. Experiment 2 demonstrates that this misunderstanding leads to underestimates of the cost of waiting to save, which makes putting off saving more attractive than it should be. Finally, Experiments 3–5 show that highlighting the exponential growth of savings motivates both college students and employees to save more for retirement. Making clear to employees the exponential growth of savings before they make crucial decisions about how much to save may be a simple and effective means of increasing retirement savings.

Credit Cards as Spending Facilitating Stimuli: A Conditioning Interpretation

Abstract. Four experiments and one study were conducted to test the hypothesis that stimuli associated with spending can elicit spending responses. In all

Earmarking and Partitioning: Increasing Saving by Low-Income Households

This research examines the effects of earmarking money on savings by low-income consumers. In particular, the authors test two interventions that are designed to enhance the effects of earmarking: (1) using a visual reminder of the savings goal and (2) dividing the earmarked money into two parts. Consistent with prior research suggesting that partitioning increases self-control, people save more when earmarked money is partitioned into two accounts than when it is pooled into one account. In addition, the presence of the visual reminder increases the savings rate. The authors conclude with implications for consumer welfare and directions for further research.

Context-Dependent Drivers of Discretionary Debt Decisions: Explaining Willingness to Borrow for Experiential Purchases

Abstract Mental accounting research suggests that consumers prefer borrowing for longer-lasting purchases in order to receive benefits from the purchases as they pay for them. In contrast, two sets of archival data and five lab studies show that consumers are more willing to borrow for experiential versus material purchases, even though experiential purchases tend to have a shorter physical duration. Further, framing the same purchase as more experiential than material increases willingness to borrow. This effect occurs because purchase timing is more important for experiential purchases—a function of consumers’ aversion to missing out on planned consumption. Thus, we moderate the proposed effect by varying whether the borrowing decision impacts planned consumption. Other differences between material and experiential purchases, such as scarcity or expected happiness, cannot similarly explain our results. Moreover, our conceptualization allows us to reconcile the apparent contradiction between the previous and current research by examining the relative impact of purchase-timing importance and payment-benefit duration matching in different contexts (i.e., “purchasing” and “source-of-funding” decisions).

The Effect of Credit on Spending Decisions: The Role of the Credit Limit and Credibility

The objective of the present research is to study consumer decisions to utilize a line of credit. The life-cycle hypothesis from economics argues that consumers should intertemporally reallocate their incomes over their life stream to maximize lifetime utility. One form of intertemporal allocation is to use past income (in the form of savings) in the future. A second form is the use of future income in the present. This can only be done if consumers have access to a temporary pool of money that they can draw from and replenish in the future—a function performed by consumer credit. However, our research reinforces prior findings that consumers are unable to correctly value their future incomes, and that they lack the cognitive capability to solve the intertemporal optimization problem required by the life-cycle hypothesis. Instead, we argue that consumers use information such as the credit limit as a signal of their future earnings potential. Specifically, if consumers have access to large amounts of credit, they are likely to infer that their lifetime income will be high and hence their willingness to use credit (and their spending) will also be high. Conversely, consumers who are granted lower amounts of credit are likely to infer that their lifetime income will be low and hence their spending will be lower. However, based on research in the area of consumer skepticism and inference making, we also argue for a moderating role of the credibility associated with the credit limit. Specifically, we argue that the above effect of credit availability would be particularly strong for consumers who believe that the credit limit credibly signals their future earnings potential (i.e., a naïve consumer who has limited experience with consumer credit). However, as consumers gain experience with credit, they start discounting credit availability as a predictor of their future and start questioning the validity of the process used to set the credit limit. Hence, with experience the effect of credit limit on the willingness to use credit should be attenuated. We test these predictions in five separate studies. In the first experimental study, we manipulate credit limit and credibility and pose subjects with a hypothetical purchase opportunity. Consistent with our prediction, credit limit impacted the propensity to spend, but only when the credibility was high. In the second experimental study, we replicate these findings even when subjects were given information about their expected future salaries, and also show that the credit limit influences their expectation of future earnings potential. In the third study, we show that the mere availability (and increase) of current liquidity cannot explain our findings. In the fourth study, we conduct a survey of consumers in which we measure a number of demographic characteristics and also ask them for their propensity to spend in a given purchase situation. In the fifth study we use the Survey of Consumer Finances (SCF) dataset, a triennial survey of U.S. families that is designed to provide detailed information on the use of financial services, spending behaviors, and selected demographic characteristics. Results from both studies 4 and 5 provide further support for our proposed framework—credit limits influence spending to a greater extent for consumers with lower credibility: younger consumers and less-educated consumers. Across all studies we achieved triangulation by using a variety of approaches (surveys and experiments), subjects types (young students and older consumers), nature of predictor variables (manipulated and measured), dependent measures (purchase likelihood, credit card balance, new charges), and methods of analysis (ANOVA and regression), and consistently found that increasing credit limits on a credit card increases spending, especially when the credibility of the limit is high. This paper joins a growing body of literature in marketing and behavioral decision theory that goes beyond the traditional domains of inquiry (e.g., product choice, effects of marketing mix variables) and focuses on consumer decisions relating to the appropriate use of income to finance consumption. Our framework differs from prior research on the effect of payment mechanisms on spending in two significant ways. First, we are interested in the effects of the availability of credit on spending, and not necessarily in the effect of the transaction format that is associated with each payment mechanism. Second, while prior research has studied the point-of-purchase and historic (i.e., prepurchase) effects of credit, the present research is concerned with the availability of credit in the future. Specifically, our framework is invariant to the current and prior usage of credit by the consumer.

Does Saving Cause Borrowing? Implications for the Co-Holding Puzzle

Using an experiment in which 3.1 million bank customers were encouraged to save, we explore the mechanisms behind co-holding liquid savings and credit card debt. Theoretically, we first show that the joint responses of spending, saving, and borrowing to the nudge differ for different economic models of co-holding. Using machine learning techniques, we then find that the most responsive individuals reduce spending and increase their savings by 4.9% (206 USD PPP per month) while their credit card debt remains unchanged. For them, the marginal responses to the nudge are consistent with our model of co-holding for the purpose of self- or partner control.