Behavioural Economics Assessment - Literature review Example

Part 1: Summary

Savings is an integral component of Behavioural Economics, especially to persons who want to achieve their financial goals. One can achieve a given financial goal through credit or saving, depending on the prevailing financial situations. However, it is not advisable to spend savings on discretionary needs because such spending amounts to a bad economic habit. Guilt and personal responsibility play a part in influencing spending patterns, especially when it comes to savings. These two factors depend heavily on mental accounting of a person when faced with difficult financial situations that require unintended expenses. The article explores existing behavioural studies to link discretionary spending of savings to consumer decisions. Economic models explain why many people prefer to maintain their savings while taking high-interest loans to finance their ways out of difficult situations. Through six experiments, the article is instrumental in highlighting how people can be aware of their savings, particularly with regard to unavoidable financial situations that may require the spending of savings instead of taking high-interest debts. This section provides a summary of the article with regard to the key tenets addressed in the article.

Spending from Savings

Most people do not consider the balance between debts and savings in making critical financial decisions. As a result, a person may feel financially stable while he/she has high levels of debts and savings that can even his/her net worth. Besides, such people prefer taking debts than drawing from personal savings even when such debts carry high interest rates. The urge to secure savings leads many people to make poor economic decisions with regard to spending. According to the authors, “Over 90 per cent of credit card borrowers hold liquid assets, and one third of individuals carrying credit card debt simultaneously hold more than one month’s worth of 6 income in liquid savings.” However, this behaviour is expensive given the fact that savings accounts accrue less interest compared to the high interests incurred on the borrowings. Various economic studies back the theories behind the simultaneous borrowing and savings.

Current Research

The simultaneous borrowing and savings experienced by various people stem from the fact that many people are impatient with their credit card borrowing although they exercise utmost patience in saving. Some households anticipate future financial situations that do not need credit card bailout. Solid savings are the sole guarantors of future financial certainty, especially by ensuring financial liquidity when needed in future. While some people borrow money to curb overconsumption from savings, others avoid spending savings because of the difficulty in rebuilding it to its previous state. Although significant amounts of research focus on consumer decisions, there is little focus on consumer behaviour with regard to essential spending. However, earmarking influences economic behaviour with regard to drawing from savings and rebuilding the same when the situation evens out.

Experiments and discussions

The six experiments of the research focused on the three fundamental hypotheses that revolved around consumer decisions, personal responsibility, and savings. The experiments focused on the three hypotheses around savings and earmarking. The first experiment tested the propensity of people to take high-interest loans in addition to assessing how the pattern varied according to individual savings account labels. The findings from the experiment supported the hypothesis in that earmarking funds played an important role in discouraging the use of such funds. Additionally, the savings account labels, namely savings account, children account, and credit card, had a significant influence on the pattern. However, people are more likely to spend account savings with every increase in credit card interest.

Experiment 2 focused on examining participants’ inclination towards borrowing with varying credit card interests. The results of experiment two were consistent with those of experiment one since the two experiments had a strong correlation. The results indicated, “Across the full range of interest rates, participants in the child condition were consistently more likely to prefer borrowing on credit than those in the other conditions” (16). The participants with child conditions were willing to pay high interests on credits compared to those with generic conditions.

When it came to experiment three, the researchers quantified and tabled the discrepancies in borrowing and spending based on the account labels. The experiment included three extra account types namely vacation, retirement, and personal education accounts. The purpose of experiment three was to understand how consumer responses relied upon savings goals across various accounts. The results proved that a strong sense of personal responsibility increased the propensity to spend on credit while maintaining or building up on savings. Experiment four, was a corollary to experiments one through to three in the sense that experiment four was based on hypothetical responses. The participants were allowed to introspect and response to various hypothetical scenarios. The results indicated that savings for a responsible goal influenced how people take credit, especially in emergencies.

Experiments 5 and 6 were closely related in the sense that they revolved around responsible saving and costly borrowing. Fundamentally, experiment five aimed at creating a distinction among the various meanings of personal responsibility when it comes to saving. Saving for responsible purposes could mean long-term thinking in saving funds or simply the perception of guilt in spending savings on discretionary needs. Accordingly, the experiment assessed the mediating role of emotions arising out of context-specific effects and spending from particular labelled accounts. The results indicated that general emotions, feelings of guilt, responsibility, and future mildness played important mediating roles between borrowing behaviour and condition.

When it comes to experiment six, behavioural interventions, such as mental accounting, were the focus. The results of the experiment indicated that most people develop responsibility and guilt perceptions from the thought of withdrawing money from savings, especially for personal use. Additionally, people lose their sense of responsibility when they constantly spend their savings as opposed to borrowing. However, additional behavioural interventions such as repayment of savings account and automatic deductions from payroll led to minimal high interest credits by creating a sense of personal responsibility. Although the six experiments served important roles in understanding the consequences of spending savings, the findings elicit different views, particularly when each of the concepts is critiqued independently.

Part 2: Commentary

The article is insightful as far as earmarking is concerned, particularly in relation to spending savings. The authors highlight some of the key corollaries to spending that may affect a person’s savings. People make hard choices when it comes to financing emergencies with a vast majority preferring to take loans rather than withdrawing from savings. The article highlights some of the fundamental reasons and assumptions behind such economic behaviours. However, a number of critical aspects of economic behaviour are evidently missing or insufficiently addressed in the article, considering the depth of the matter. Accordingly, this section provides a critical assessment of the article in terms of criticism and support where necessary, particularly the article’s contribution vis-à-vis the existing relevant literature (Goldstein, Nenkov, Payne, Zhao, Soman, & Kim 2015, p. 43).

Support

The findings by the article are instrumental as far as the benefits of long-term savings are concerned. The findings can be extended to a global scale because the behavioural patterns of people vary insignificantly in relation to how they spend their finances. The article employs the concept of mental accounting in unearthing some of the behavioural perspectives of various people when it comes to making financial choices. The article assesses how time, perceived outcomes, decision-making, and earmarking depend on mental accounting. When individuals make financial choices in relation to borrowing or withdrawing from savings, the concept of mental accounting prevails. In essence, the article reveals the extent to which mental accounting influences behavioural economics at the personal level (Sussman & O’Brien, 2014).

The article explains the correlation between behavioural intervention and personal responsibility with regard to withdrawing savings. Unlike most scholarly articles that ignore the relevance of automatic payroll deductions in fostering savings, the article links such behavioural intervention to a sense of personal responsibility. The article supports behavioural intervention that aims at reducing the costs of borrowing. Besides, the article tackles the concept of account labelling in a unique manner that most studies do not, considering the multiplicity of factors linked to savings, and borrowing (Wilkinson & Klaes 2012, p. 27).

Consumer decision-making is an important area of behavioural economics that the article gives a keen analysis. The article contributes to the topic of mental accounting by highlighting the impact of guilt perceptions and personal responsibility on the saving and borrowing behaviours of consumers. Accordingly, further studies can expand on the repercussions of guilt perception on borrowing from high interest credit. However, the article provides a wholesome analysis of the mental effect in making saving and withdrawing decisions, especially in discretionary matters (Goldstein, Nenkov, Payne, Zhao, Soman, & Kim 2015, p. 43).

Account labelling is a new concept introduced in the article to elucidate in relation to consumer behaviour. The article experiments and provides concrete findings with regard to the significance of labelling meaningful accounts. The findings indicate that people are willing to make specific saving and borrowing decisions because of account labelling. In essence, people accord more preference to the savings account than to the children account when it comes to withdrawing money for discretionary purposes. Although the article explains the concept of account labelling, it leaves room for further research to be conducted (Egan, Corrigan, & Dwyer 2015, p. 123).

When it comes to purpose-driven decision making, the article delves into the tenets of personal responsibility. The purpose or goal for saving a specific amount of money in an account always overrides the decision to withdraw from the same account. The sixth experiment of the study is useful in elucidating the role of purpose of savings in avoiding unintended withdrawals. The theory of economic behaviour varies across experiments, depending on the focal point for specific studies. The authors of the article offer an all-inclusive approach to the issue of economic behaviour in relation to borrowings and savings. Consumer decision is a critical component of economic behaviour because it affects how a nation operates and performs in financial terms (Sussman & O’Brien, 2014).

The article is comprehensive in using six experiments to determine and explain the borrowing and saving patters of people. Fundamentally, the article explains how mental accounting interacts with feelings of guilt and personal responsibility. The combination of different experiments boosts the credibility of the study, given the consistency of the findings of the experiments at different levels. Besides, the findings of the research support all the three hypotheses, which mean that the article is valid in terms of its contribution to the field of economic behaviour.

Sussman and O’Brien (2016) state the following with regard to the contribution of the article to the studies of economic behaviour in the global context:

The findings reported above demonstrate that rather than encouraging behaviour, that maximizes global financial benefits and savings in the long term, labels on spending accounts can lead people to incur costs to achieve the local goal of preserving savings in a specific account in the moment (34).

The saving pattern demonstrated in the article is beneficial to the global economy because it encourages the populace to be keen on savings while discouraging unnecessary withdrawals. It means the people who adhere to the economic pattern can have more money and assets at their disposal for use when needed. This economic behaviour is called ‘future mindedness’ and the authors of the article explore it from different perspectives (Madrian 2012, p. 39).

Criticism

Although the article makes significant contributions to the theory of economic behaviour, it has some shortcomings that require to be addressed in future studies. For instance, the study uses the same participants for all the six different experiments, which creates biasness and validity issues among the respondents (Sun, 2015). In a meta-analysis study such as the one done on economic behaviour, it is advisable to use different participants in each experiment in order to obtain independent views that are not consistent with previous views. Additionally, it was not necessary to conduct six experiments to arrive at the same results. The researchers would have integrated their research questions and questionnaires and solicit views based on the expanded questionnaires (Goldstein, Nenkov, Payne, Zhao, Soman, & Kim 2015, p. 43).

Although the article explores the concept of mental accounting comprehensively, it does not show how mental accounting relates to the standard perspectives of incentives in economics. The standard views of incentives are important when assessing economic behaviours of various consumers (Chen, Kök, & Tong 2013, p. 443). The three fundamental factors that the article ought to have researched include utility, maximizes, and self-interest. These factors affect the economic behaviour of people significantly, especially when they have to make choices whether to withdraw money from their savings. The choices encompass the effectiveness, repercussions, and rationality of economic behaviour. Instead of just focusing on personal responsibility and guilt, the article should have assessed the rationality, consequences, and utility of choices to the decision-maker (Babiarz & Robb 2014, p. 48).

Part 3: Application

Although the article contributes immensely to the scholarly world, its findings also have a number of policy and business applications. Organizations from across the globe can exploit the relevant behavioural patterns established in the study to further their goals ambitions. The theory of economic behaviour applies to individuals both at the personal and organizational level (Egan, Corrigan, & Dwyer 2015, p. 123). It means that economic decisions made by consumers or other stakeholders may affect organizations in different ways, depending on the nature of the transaction. The behavioural patterns in this case include earmarking for savings, personal responsibility, feeling of guilt, future mindedness, and borrowing from high interest loans. The behavioural patterns may work differently for various organizations according to the prevailing circumstances that are unique to every organization (Wilkinson & Klaes 2012, p. 27).

The findings from the study are instrumental in the optimization of global financial benefits through the promotion of positive economic behaviour that considers personal responsibility. In essence, the results from the six experiments outline the significance of long-term savings, which organizations can take up to create schemes for their employees. The intervention schemes can be in the form of monthly deductions to cater for long-term financial benefits such as retirement benefits. This form of earmarking money entails a scenario where the employers take charge of their employees’ finances with regard to savings. When organizations make it company policy for all employees to take deduction from their wages, the benefit will be far-reaching in that the employees will act reasonably and utilizing the available resources efficiently (Madrian 2012, p. 36).

The financial services companies can exploit the economic behaviour of people to maximize profits from interests charged on loans. Owing to the borrowing pattern by most people who prefer to save, businesses can accrue profits by lending people credits with high interests. More often than not, people avoid guilt by taking credits as opposed to withdrawing moneys from savings. The reluctance of many people across the globe to spend their savings is a big encouragement to financial firms to exploit the opportunity to charge high interest rates. However, such companies ought to play by the rules in that they ought not to appear as extortionist cartels that are out to swindle desperate people of their money. The financial companies such as organizations and banks can apply the mental accounting techniques to provide loans to customers in a way that satisfies the need in terms of self-interest, utility, and rationality (Sussman & O’Brien, 2014).

The government and organizations that employ people ought to utilize the concept of labelling of accounts in order to promote responsible savings and borrowing by consumers. Consumer decision-making depends largely on the labelling of various savings accounts. For instance, earmarking money for savings seems to be working for solid investments such as real estate (Chen, Kök, & Tong 2013, p. 443). Accordingly, the real estate firms can collaborate with employers and banks to provide employees with saving schemes that can enable them realize their real estate dreams. Most people, including employees, avoid spending their savings because they wait to spend such funds on responsible goals. It is the duty of interested firms to establish the responsible goals of their stakeholders and work towards helping people attain such goals while maximizing profit at the same time (Babiarz & Robb 2014, p. 45).

When it comes to enacting and protecting the relevant policies to protect consumers, financial institutions and government agencies ought to adopt changes that support people’s preferences in savings. The propensity by a majority of people to reserve money for future use, while taking loans to finance present needs, is a worthwhile economic behaviour for investment (Hastings & Shapiro 2012). Organizations ought to exploit the behavioural patterns by instituting policies that encourage savings amongst the populace, an initiation that can work for the benefit of both parties. However, such organizations ought to be keen on the amount of interest that they charge on loans because imposing high interests may work unfavourably to the organizations and financial institutions (Madrian 2012, p. 36).

The evidence presented in the article demonstrates the preference of consumers to borrow money rather than withdraw money from their value savings, an attribute that micro-finance institutions can embrace to develop nations at both the community and family levels (Wilkinson & Klaes 2012, p. 27). The organizations can promote savings by offering credit facilities at low interest rates to their loyal consumers. It means that people who are consistent with their savings can obtain guaranteed loans that they can repay later using external resources rather than the loan being deducted from their savings. This is one of the policies that most humanitarian organizations across the globe have adopted in a bid to end abject poverty (Babiarz & Robb 2014, p. 43).

Reference List

B Sussman A B & O’Brien R L 2016, ‘Knowing When to Spend: Unintended Financial Consequences of Earmarking to Encourage Savings’, Journal Of Marketing Research In Press, http://dx.doi.org/10.1509/jmr.14.0455.

Babiarz, P & Robb, C A 2014, Financial literacy and emergency saving’, Journal of Family and Economic Issues, vol. 35, no. 1, pp.40-50.

Chen, L, Kök, A G &Tong, J D 2013, ‘The effect of payment schemes on inventory decisions: The role of mental accounting’, Management Science, vol.59, no. 2, pp.436-451.

Egan, K J, Corrigan, J R & Dwyer, D F 2015, ‘Three reasons to use annual payments in contingent valuation surveys: Convergent validity, discount rates, and mental accounting’, Journal of Environmental Economics and Management, vol.72, pp.123-136.

Goldstein, D, Nenkov, G Y, Payne, J, Zhao, M, Soman, D, & Kim, J 2015, ‘Consumer Financial Decision Making: Understanding Savings Accumulation and Decumulation Decisions’, Advances in Consumer Research, vol. 43.

Hastings, J & Shapiro, J M, 2012, ‘Mental accounting and consumer choice: evidence from commodity price shocks’, (No. w18248), National Bureau of Economic Research.

Madrian, B C 2012, Matching contributions and savings outcomes: A behavioural economics perspective (No. w18220), National Bureau of Economic Research.

Sun, I, 2015, ‘Spend or Save? What to Decide When Faced with Financial Emergencies’, Chicago Policy Review (Online). Retrieved from http://search.proquest.com/openview/6217a17bb3b48654117e8b9e148df53f/1?pq-origsite=gscholar&cbl=1576347

Sussman, A B & O’Brien, R L, 2014, ‘Saving for a purpose: The financial consequences of protecting savings’, Available at SSRN. http://faculty.chicagobooth.edu/abigail.sussman/research/pdfs/SavingforPurpose.pdf

Wilkinson and Klaes 2012, An Introduction to Behavioural Economics (2nd Edition), Palgrave MacMillan, London.