Most of us believe we’re financially responsible. But in reality, we’re probably not. A new study suggests that our false perceptions about money habits contributes to the global trend of people failing to save enough. However, if we could be tipped into recognizing that we’re spending when we shouldn’t, this trend might one day be reversed.
Building Indiana Business spoke with Emily Garbinsky, assistant professor of marketing at Notre Dame’s Mendoza College of Business, to learn more. She and her co-authors from York University and the University of New England in Australia published their study titled “Popping the Positive Illusion of Financial Responsibility Can Increase Personal Savings” earlier this year in the Journal of Marketing.
A Possible Cause for Undersaving
For this study, the authors defined financial responsibility as managing money in a sensible way that minimizes superfluous or unnecessary spending. Their findings indicated that a disproportionate amount of people believe themselves to be good savers when that’s likely not the case. We asked Garbinsky to explain a bit about what’s going on.
“Only half of the population can be above average when it comes to their savings behavior,” Garbinsky said. “But our surveys found that about 70% of our respondents consider themselves to be above average when it comes to their savings.”
“People want to view themselves favorably, and this is even more likely to happen when they’re stressed. Because finances are a very common source of stress, we see this cause people to think they’re better with their finances than they actually are,” she said.
This inaccurate line of thinking could very well have contributed to the global trend of undersaving that has been the subject of economic research for quite some time now. People all over the world fail to save adequately, and false perceptions could be a reason why.
In the U.S., for example, the personal savings rate has been in the 6% to 8% range for the last decade or so, according to the Federal Reserve Bank of St. Louis. That refers to the amount of income a person has each month after taxes and spending. The pandemic saw that figure sharply spike, but it has gradually been coming back down with more re-openings throughout the country.
This link between false perceptions and undersaving gave Garbinsky and her co-authors an idea. They developed an intervention designed to show people how often they were unnecessarily spending. The logic was that a realization could lead to changes in behavior.
Triggering a Realization
At locations in both the U.S. and abroad, the researchers in the “Popping the Positive Illusion” study administered their “superfluous-spender” intervention.
This involved having participants answer a brief survey about their past superfluous spending behavior. More specifically, participants responded to five questions using a continuous scale that was anchored by a relatively low frequency (1 = once a year or less) or a relatively high frequency (7 = 12+ times a year). The test was designed so that most participant responses would fall in the upper range, with higher scores indicating greater frequencies of past superfluous spending.
That part was really important, Garbinsky explained, because categorization in upper ranges pushes people to infer that they are not as financially responsible as they thought they were. In other words, a high score might surprise someone into realizing they’re not saving as well as they should.
This realization pushes people into making better choices about saving and could potentially have a big impact on savings rates around the world.
Potential for a New Savings Tool
Considering the intervention is relatively inexpensive and easy to administer, we asked whether or not it would be hypothetically possible to put something like this into widespread use in the financial sector. Garbinsky mentioned that she and her colleagues have discussed the possibility.
“There’s a few ways this could potentially be administered in the real world. We would want the intervention questions to be administered right before someone makes a savings decision. For example, we envision this would be administered by a bank right before someone opens a savings account. Or potentially by a financial advisor before someone begins to plan for retirement. Or even by an online banking app right before someone sets up a savings goal,” she said.
Could Effect Change
Sometimes even the simplest things can effect real change. If more people could be shown how much better they could be saving, then maybe one day the world trend of undersaving could start to be reversed. All we’ll have to do is pop the illusion of our false beliefs about personal financial responsibility.
