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The Role of Savings Goals in the Prediction of Personal Spending. Johanna Peetz and Roger Buehler Wilfrid Laurier University. Peetz & Buehler (in press), PSPB. Spending predictions. Past research on spending
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The Role of Savings Goals in the Prediction of Personal Spending Johanna Peetz and Roger Buehler Wilfrid Laurier University Peetz & Buehler (in press), PSPB
Spending predictions Past research on spending • Spending behavior e.g., Furnham, 1999; Kidwell et al., 2003; Lee & Ariely, 2006; Vohs & Faber, 2007 • Corporate forecastse.g., Flyvberg et al., 2009; Schwartz & Cohen, 1995 Past research on predictions • Predictions are often optimistically biased e.g., Armor & Taylor, 1998; Dunning, 2007 • Time spent on projects is underestimated →”planning fallacy” e.g., Buehler et al., 1994, 2002; Kahneman & Tversky, 1979
Goals and Predictions • Two theories of goals affecting predictions • Motivated reasoning (Kunda, 1990) • Desirability bias (Krizan & Windschitl, 2007) • Goals affecting behavior? • Increased commitment(Locke & Latham, 1990) • Corresponding plans(Gollwitzer, 1999) • Goals and intentions affect predictions more than behavior (Buehler et al., 1997; Epley & Dunning, 2000, 2006) e.g., donating blood (Koehler & Poon, 2006)
Savings goals • Preference to minimize expenses and keep expenditures under control • Savings goals should have a greater impact on predicted than actual spending • Self-control(Faber & Vohs, 2004; Rabinovich & Webley, 2007) • Multiple competing goals
Present Research HYPOTHESES • People underestimate personal spending • Savings goals contribute to this bias • The more people want to save the more they predict to reduce their spending • But wanting to save money might not translate into behavior
Study 1 – Is there a bias? “all expenses included except large sums that would occur only once a month, such as rent” 31 undergraduate students TIME 1 Predicted spending in the next week Recalled spending of past week TIME 2 Recalled spending of past week: Actual Spending Predicted spending in the next week
Study 1 – Is there a bias? 140 120 * * 100 * Spending 80 in $ 60 40 20 0 Past Predicted Actual Predicted (Week 1) (Week 2) (Week 2) (Week 3)
Study 2 – The Role of Savings Goals 30 undergraduate students TIME 1 Rated saving goals and other money attitudes Predicted spending in the next week DIARY Every night, listed spending of past day: Σ7 days= Actual Spending TIME 2 Recalled spending of past week
Study 2 – The Role of Savings Goals Spending in $ 140 120 ** 100 80 60 40 20 0 Predicted Actual Remembered
Study 2 – The Role of Savings Goals Predicted Spending Actual Spending “Saving money is important to me” -.38* -.07 * p < .05
Study 3 – Ruling out Demand 88 undergraduate students TIME 1 Rated savings goals and other money attitudes M = 48 days later TIME 2 No reminder condition-- Goal reminder conditionRated savings goals Vs. Predicted spending in the next week
Study 3 – Ruling out Demand • Average predictions did not differ significantly by condition Goal reminder condition No reminder condition Predicted Spending Time 1Saving goals -.32* -.40* Time 2Saving goals -.37* -- * p < .05
Study 4 - Manipulating Savings Goals 56 undergraduate students TIME 1 Strong Saving Goal Vs. Weak Saving Goal People who save money are generally more successful in life. e.g., Saving money is just one indicator of a future oriented approach to life, which is linked to career success. People who spend money are generally more successful in life. e.g., Spending money is just one indicator of a spontaneous approach to life, which is linked to career success. Predicted spending in the next week TIME 2 Recalled actual spending in the week
Study 4 - Manipulating Savings Goals Spending 200 in $ 180 160 ** 140 120 100 80 60 40 20 0 StrongSaving Goal WeakSaving Goal
Instances outside savings goals:Study 5 -Spending money on friends 38 undergraduate students TIME 1 Identified a friend’s birthday coming up in the next 2 month Predicted spending for this birthday Rated the reason for their prediction (7-point scales): Thoughts about saving goals Thoughts about feelings about the friend Recalled usual spending for birthdaysRecalled past spending for this friend’s birthday
Instances outside savings goals:Study 5 - Spending money on friends $ 60 50 Usual * * Past 40 Predicted 30 20 10 0 Birthday Spending
Instances outside savings goals:Study 5 - Spending money on friends ** Compare to a separately collected sample predicting weekly spending:
Conclusions and Implications • People routinely underestimate future spending • Contributes to literature on money vs. time accountingLeclerc et al., 1995; Okada & Hoch, 2004; Soman, 2001 • “Budget fallacy” similar to “Planning fallacy” • The goal to save money amplifies the optimistic spending bias • Poor predictions may lead to poor budgeting decisions Ironically, those individuals who are most motivated to improve their finances, may generate the worst financial plans!
Future directions and current studies • Cognitive mechanisms • Knowing items (i.e., “unpacking”) • Knowing prices • Construal level • Different prediction objects • Monthly and daily time periods • Event spending
Thank you Questions and Comments?