The ant and the grasshopper revisited: The present psychological benefits of saving and future oriented financial behaviors

This study examines the impact of saving and future-oriented financial behaviors on young adults’ well-being. Using two-timed longitudinal data (N = 748) collected both prior to and during the economic crisis, we tested and confirmed a psychological process model (i.e., financial attitude → behavioral intention → actual behavior → well-being), one that included parental norms, perceived behavioral control and financial planning horizon as antecedent factors. Our findings indicate that the more positive a young adult’s attitude toward financial behaviors, and the greater his/her perception of parental expectations, then the stronger will be this young adult’s intention to perform such behaviors. We found that behavioral intention at Time 1 contributed to actual financial behaviors at Time 2, which in turn was positively related to a young adult’s present sense of well-being. We also found that perceived behavioral control and financial planning horizon influenced both behavioral intention and actual behavior. Although perceived impact of the economic crisis moderated the link between past and present well-being, it did not affect the hierarchical flow of the model. We discuss the theoretical and practical implications of our study pertaining to consumer financial education.     

INVESTMENT SHOCKS,CONSUMPTION PUZZLE,AND BUSINESS CYCLES

A mass of recent research shows that investment shocks are primary driving forces of business cycles. A thorny issue, however, arises due to countercyclical consumption behavior following the investment shocks. This article contributes to the literature by resolving this anomalous issue in a model that features time inconsistency, modeled as naïve hyperbolic discounting. The proposed model delivers positive responses of consumption to an investment shock and thus produces comovement of key macroaggregates, which is in line with the observed U.S. business cycles. Furthermore, this article also substantiates the validity of the proposed model by producing comovement following an investment news (or anticipated investment) shock. Additional analyses on changes in model structure and parameter value do not reverse the main finding. (JEL E3, E7)     

How time preferences differ: Evidence from 53 countries

We present results from the first large-scale international survey on time preference, conducted in 53 countries. All countries exhibit hyperbolic discounting patterns, i.e., the immediate future is discounted more than far future. We also observe higher heterogeneity for shorter time horizons, consistent with the pattern reviewed by Frederick, Loewenstein, and O’Donoghue (2002). Cultural factors as captured by the Hofstede cultural dimensions (Hofstede, 1991) contribute significantly to the variation of time discounting, even after controlling for economic factors, such as GDP, inflation rate and growth rate. In particular, higher levels of Uncertainty Avoidance are associated with stronger hyperbolic discounting, whereas higher degrees of Individualism and Long Term Orientation predict stronger tendency to wait for larger payoffs. We also find the waiting tendency is correlated with innovation, environmental protection, crediting rating, and body mass index at country level after controlling for county wealth. These results help us to enhance the understanding of differences across financial markets and economic behavior worldwide.     

Risk-Taking,Delay Discounting,and Time Perspective in Adolescent Gamblers: An Experimental Study

Previous research has demonstrated that adult pathological gamblers (compared to controls) show risk-proneness, foreshortened time horizon, and preference for immediate rewards. No study has ever examined the interplay of these factors in adolescent gambling. A total of 104 adolescents took part in the research. Two equal-number groups of adolescent non-problem and problem gamblers, defined using the South Oaks Gambling Screen-Revised for Adolescents, were administered the Balloon Analogue Risk Task (BART), the Consideration of Future Consequences (CFC-14) scale, and the Monetary Choice Questionnaire (MCQ). Adolescent problem gamblers were found to be more risk-prone, more oriented to the present, and to discount delay rewards more steeply than adolescent non-problem gamblers. Results of logistic regression analysis revealed that BART, MCQ, and CFC scores predicted gambling severity. These novel finding provides the first evidence of an association among problematic gambling, high risk-taking proneness, steep delay discounting, and foreshortened time horizon among adolescents. It may be that excessive gambling induces shortsighted behaviors that, in turn, facilitate gambling involvement.     

ASSET MANAGEMENT,ALLOCATION OF TIME,AND RETURNS TO SAVING*

The paper entertains the proposition that individuals' time performs a productive role in generating nonwage income through the management of nonhuman capital assets. The asset management hypothesis is used to develop a life cycle model of consumptive and productive decisions. The model allows for variations in gross rates of return both across persons at a point in time and for any one person over his life cycle. The behavioral implications developed show that differences across consumption units in their time allocations and in their borrowing, saving, and asset holding decisions may be the result of differences in opportunities rather than “tastes.”     

p-Weakly constrained Pareto efficiency and aggregation in incomplete markets

This paper studies aggregation and a weak form of optimality referring to the p-weakly constrained Pareto efficiency (p-WE) in stochastic finance economies with incomplete markets. We derive a representative agent utility function maximized at equilibrium and a characterization of the set of p-WE allocations. Moreover, we establish the correspondence between the set of competitive equilibrium allocations and the set of p-WE allocations. It is noted that these are accomplished for general time-state utility functions and without restrictions on the initial resource allocations.     

Existence of efficient envy-free allocations of a heterogeneous divisible commodity with nonadditive utilities

This paper studies the existence of Pareto optimal, envy-free allocations of a heterogeneous, divisible commodity for a finite number of individuals. We model the commodity as a measurable space and make no convexity assumptions on the preferences of individuals. We show that if the utility function of each individual is uniformly continuous and strictly monotonic with respect to set inclusion, and if the partition matrix range of the utility functions is closed, a Pareto optimal envy-free partition exists. This result follows from the existence of Pareto optimal envy-free allocations in an extended version of the original allocation problem.     

Mental discounting and financial strategies

Subjective discount rates have been used as measures of time preference to explain saving behavior, with varying results. There is also a lack of agreement between different explanatory models of subjective discount rates. In this paper, it is argued that a better understanding of subjective discount rates can be reached by using groups with different financial strategies as domains. It is shown by PLS and regression analyses that the mental discounting process differs between groups practicing different financial strategies and that the explained variance of subjective discount rates and thus the understanding of such rates are improved by using financial strategy groups as domains.     

Probabilistic cheap talk

We consider a model in which there is uncertainty over when a one-shot game will be played. We show how a mechanism designer can implement desirable outcomes in certain economic games by manipulating only the probability that the game is played in a given round while leaving all other aspects of the game unchanged. We also show that if there is no discounting, this uncertainty imparts a sequential structure that is almost mathematically equivalent to a repeated version of the game with discounting. In particular, a folk theorem applies to such games. Thus, games of probabilistic cheap provide a third interpretation of the repeated game framework with the additional feature that expected payoff is invariant to the probability of the game ending. Received: 10 May 1999/Accepted: 16 October 2000     

Can preferences for catastrophe avoidance reconcile social discounting with intergenerational equity?

A social welfare function treating all generations equally is derived from a set of axioms that allow for preferences for catastrophe avoidance or risk equity. Implications for the case where there is a risk of world extinction are studied. We show that substantial time discounting can arise from the planner’s taste for catastrophe avoidance, even if the probability of the world ending is infinitesimally small. We wish to thank Marc Fleurbaey, Thibault Gajdos, two anonymous referees and an associate editor for many valuable comments.     

Money-metric utilitarianism

We discuss a method of ranking allocations in economic environments which applies when we do not know the names or preferences of individual agents. We require that two allocations can be ranked with the knowledge only of agents present, their aggregate bundles, and community indifference sets—a condition we refer to as aggregate independence. We also postulate a basic Pareto and continuity property, and a property stating that when two disjoint economies and allocations are put together, the ranking in the large economy should be consistent with the rankings in the two smaller economies (reinforcement). We show that a ranking method satisfies these axioms if and only if there is a probability measure over the strictly positive prices for which the rule ranks allocations on the basis of the random-price money-metric utilitarian rule. This is a rule which computes the money-metric utility for each agent at each price, sums these, and then takes an expectation according to the probability measure.     

Equitable Intergenerational Preferences on Restricted Domains

This paper examines the existence of equitable preferences on intergenerational consumption paths in an infinite horizon setting. There are two ethical considerations that capture the concept of intergenerational equity: inequality aversion in allocations and equality in treating generations. They are embodied in the Pigou–Dalton principle and anonymity, respectively. We investigate the existence of binary relations that satisfy these two axioms, as well as other standard axioms, such as monotonicity, transitivity, or continuity, on various domains. We show that any domain admitting such a binary relation is quite restricted: its interior is empty and contains no sustainable consumption path.     

Social choice in economic environments with dimensional variation

An argument for welfarist social evaluation is presented that replaces the independence axiom with a consistency axiom for social-evaluation functionals in economic environments. This axiom (consistency across dimension or COAD) requires that, if two allocations contain suballocations in common, and if individual utility functions are projected down to the smaller economy where allocations change, then these small allocations must be ranked in the same way that their ancestral allocations were.The basic result is applied to different information environments and a variety of ethical axioms appropriate to economic environments is investigated.We are indebted to Charles Blackorby, Erwin Diewert, Ed Morey, Bill Schworm and John Weymark for helpful discussions, and to the Social Sciences and Humanities Research Council, the Killiam Foundation and the National Science Foundation, for research support.     

Is automatic enrollment consistent with a life cycle model?

We examine retirement saving for young adults in a life cycle model. We find that optimal retirement saving is zero for liquidity-constrained young adults who anticipate significant earnings growth. With a plausible age-earnings profile for college-educated workers, retirement saving does not begin until the late 30s or early 40s. Workers facing a flat earnings profile begin saving much sooner. Participating may be optimal for younger workers facing steep earnings profiles if they anticipate switching jobs and cashing out after 1–2 years. Our results suggest that automatically enrolling workers, regardless of age, is not consistent with a life cycle model.     

INCOME SMOOTHING AND SELF-CONTROL: THE CASE OF SCHOOLTEACHERS

Approximately one-half of California's Unified School Districts give teachers a choice of receiving their annual salaries in 10 or 12 monthly payments. Intertemporal utility maximization à la Irving Fisher suggests that they should choose 10 payments and earn interest on their savings. But about 50% of the teachers choose 12 installments, even though when summed over a reasonable period the forgone interest can be considerable. This behavior can be explained by the cost of exercising self-control and by Laibson's model of hyperbolic discounting. A survey of teachers supports this interpretation. (JEL D91 , D12 )     

A simple procedure for finding equitable allocations of indivisible goods

The paper investigates how far a particular procedure, called the “descending demand procedure,” can take us in finding equitable allocations of indivisible goods. Both interpersonal and intrapersonal criteria of equitability are considered. It is shown that the procedure generally fares well on an interpersonal criterion of “balancedness”; specifically, the resulting allocations are Pareto-optimal and maximize the well-being of the worst-off individual. As a criterion of intrapersonal equitability, the property of envy-freeness is considered. To accommodate envy-freeness, a modification of the basic procedure is suggested. With two individuals, the modified procedure is shown to select the envy-free allocations that are balanced, i.e. the allocations that maximize the well-being of the worse-off individual among all envy-free allocations. Received: 3 March 2000/Accepted: 27 November 2000     

Problem and Pathological Gambling in Schizophrenia: Exploring Links with Substance Use and Impulsivity

High rates of both problem and pathological gambling (PPG) and substance-use disorders (SUDs) have been reported in schizophrenia, and yet PPG frequently goes undetected in clinical practice and unexamined in research. Here, we aimed to examine the relationship between PPG and SUDs in a large sample of patients across several factors related to both gambling and substance use, including poly-substance use. Additionally, delay discounting is a form of impulsivity known to positively associate with both PPG and SUDs and thought to underlie mechanisms of addiction in both contexts. We aimed to investigate the relationship between PPG and delay discounting in schizophrenia. 337 individuals with schizophrenia completed structured face-to-face interviews regarding gambling behaviors, substance use, and delay discounting. PPG in schizophrenia was associated with substance use, in particular with poly-substance use, and with delay discounting among males. Factors related to substance use were strongly linked with gambling in this sample, but not always with PPG more than recreational gambling. Our findings overall support the notions that multiple forms of gambling in schizophrenia are clinically relevant, that gambling may share common substrates with substance use, and that delay discounting represents a potential mechanism of this association in males.     

An algorithm for envy-free allocations in an economy with indivisible objects and money

This paper studies envy-free allocations for economies with indivisible objects, quasi-linear utility functions, and an amount of money. We give a polynomially bounded algorithm for finding envy-free allocations. Connectedness of envy-graphs, which are used in the algorithm, characterizes the extreme points of the polytopes of sidepayments corresponding with envy-free allocations. Received: 22 October 1997/Accepted: 19 January 1999     

Greed and adolescent financial behavior

Financial problems in adolescents have increased over the last decades. We investigated if individual differences in greed relate to financial behavior. Greed is an important motive for economic behavior and refers to the tendency to never be satisfied and to always want more. We developed a short version of the Dispositional Greed Scale (Seuntjens, Zeelenberg, Van de Ven, & Breugelmans, 2015), which we then used in a large survey with adolescents (N = 3899). Dispositional greed is associated with them having more income, spending more, saving less often, and having debt more often. Identifying what personality characteristics influence financial behavior at a young age is important, as the financial habits that people learn during adolescence persist in adulthood. We find that greed has both positive effects (having a higher income), but also negative effects with the greedy being less likely to save and being more likely to have a debt.