Zazzle Shop

Screen printing

Tuesday, September 16, 2008

The Psychology of Saving More

Financial planners often suggest clients figure out how much they'll need to retire and save toward that huge number. Utpal "Paul" Dholakia, associate professor of management at Houston's Rice University, thinks people would do better to think about how much they'll save next month. A paper he co-wrote with Leona Tam of Old Dominion University found that those who planned savings for the next month did far better than those who tried to plan further out. In one experiment, people said they'd save an average $287 next month but saved $440. When asked to plan ahead four months, they said they'd save an average $946, but put aside just $123. Amy Feldman spoke with Dholakia.

Did the results surprise you? We were shocked. How can someone tell you they will save $1,000 and then only save $100? It's a gross misprediction of behavior.

So we're better off trying to save for next month than next year? That's it. Don't plan in advance because it makes you overoptimistic. You think: "I might get a windfall or a raise." And not only do people who give a savings estimate for four months from now estimate too high but they become more risk-seeking.

Is this just an American problem? We're working with colleagues in China and Korea to see if this translates. In Korea, the young are Westernized, so we think [their behavior] will look like that of Americans.

-Edited by Suzanne Woolley