MONEY AND SHOPPINGsavings, yet people will have locked the savings money tight in a “mental
safe” as secure as if it were built of steel. The consequence, of course, is
that they lose money each month, rather than simply paying off the loan
(or a portion of it) and starting from scratch.
The problem with saving
When we are in the enviable position of being able to put money by,
most of us don’t save enough. We place more value on money in our
hand today than the prospect of the same or a greater amount avail-
able at some point in the future. In fact, the more distant the date, the
less value we place on the money – a phenomenon known as parabolic
discounting. This aversion to saving probably played a part in the global
financial crisis that occurred at the end of the first decade of the twenty-
first century (see p.280). In the UK between 2000 and 2002, the average
amount of household income saved fell to 5.9 percent from an average of
9 percent between 1990 and 1999.
Clues as to how to save more effectively were uncovered in a 2007 study
by Anna Rabinovich and Paul Webley. Using data collected over several
years as part of the Dutch DNB Household Survey, they identified 1360
people who said they planned to save over the next two years and did,
and 89 people who similarly said they planned to save over that period,
but failed.
A key difference between the successful and failed savers was that
the former tended to say that the future was more important to
them – what the researchers called their “time horizon” was projected
further forward. The successful savers also used techniques to control
their saving, including setting up the automatic transfer of funds into
a savings account each month. This and other techniques used by
successful savers all helped to make the savings process more automatic
and therefore less dependent on will power.
Overconfidence
Most of us are poor financial decision-makers, and yet most of us are
also over-confident about our monetary know-how – a bad combina-
tion! A powerful source of evidence for our overconfidence comes from
the stock market. People who trade stocks and shares usually make
many more transactions than they ought to (called “churning”), because
they think they know what they’re doing when they don’t. To take one