How and why consumers and investors save, has remained as a puzzle since modern economists approached the question. Clearly, we save because we have to, but we rarely ever want to save as an end in and of itself. Current the leading models present this dilemma as a struggle between two personal selves: a present self who wishes to consume and a future self who relies on prior savings. This paper will attempt to survey various approaches that attempt to reconcile this dual-self dilemma, explain what causes us to save, and discuss why it is becoming increasingly important to start taking saving seriously.
[...] This mentality has shifted the U.S.'s ballooning asset bubble from stocks to homes, and Shiller points out that this is, in fact, a common historical pattern. What is different now, however, is that investors are increasingly able to tap into their home equity thanks to the innovation and widespread extension of home equity loans and home equity lines of credit. These financial products have added to the movement towards perfectly liquid markets, and I will return to them in the next topic of discussion. [...]
[...] Personal Savings Crisis The personal savings rate measures savings as a share of disposable income, and it has been falling dramatically in the United States since the early 1980s. This trend is of central importance to the issue of self- control because it calls empirical attention to the fact that we are not, by any means, adhering to the neoclassical life-cycle model of savings. Thaler (1994) highlights the absurdity of the conclusion that the life- cycle hypothesis gives us, which is that “undersaving is impossible.” On the contrary, the ageing baby-boomer generation is on the verge of retirement and thus we should expect greatly increasing savings rates if people were considered to be rational. [...]
[...] While real home prices have in fact remained stable for over a hundred years (see Shiller), what has changed has been the ability to turn home equity into cash and spend it. The introduction of both home equity loans (HELs) and home equity lines of credit (HELOCs) have allowed homeowners to borrow against their home values without necessarily having to draw out cash and refinance at higher rates. Instead, HELs and HELOCs are usually tied to the prime rate, and they also come with tax- deductibility options depending on the state both are features that have made them more appealing than second mortgages. [...]
[...] Clearly, many individuals are willing to pay a premium for an established commitment device, and this suggests that even when we are aware of our lack of self-control we are still unable to easily correct it. The results show that “users who pay a high price per attendance in the monthly contract display a longer gap between last attendance and contract termination.” In other words, people who stopped going to the gym frequently took an extended amount of time to cancel their contract and/or switch to a cheaper contract. [...]
[...] The fact that individuals are willing to save as long as they don't have to do it now highlights a problem in being able to properly discount, since saving immediately would yield greater returns than saving starting from any period of time in the future would. To further illustrate, Graham and Isaac study teachers at American University who are given the option to take their academic-year income over nine months or over twelve months. From their sample of 109 professors (or of the teachers choose the twelve-month income stream. [...]
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