Mental accounting psychology and life cycle economics: Who saves, who doesn't and how to tell the difference
Wealth is often associated with status purchases or belonging to a demographic group instead of a cognitive decision process for saving and accumulating wealth. Mental accounting psychology (Kahneman & Tversky, 1979; Shefrin & Thaler, 1988) and life cycle economics (Modigliani & Brumberg, 1954) describe two different saving processes. Qualitative interviews in Study 1 (adult heads of household, n = 24) and a quantitative analysis in Study 2 (2001 Survey of Consumer Finances, n = 4,332) compared high and low saving people using mental accounting and life cycle variables. Interviews in Study 1 predominantly described saving in terms of short-term, mental accounting heuristics that separated assets and provided self-control for spending. Participants did not report a life-cycle saving process that pooled assets, rationally allocated wealth over time or set a long-term, optimal spending level. Study 2 also supported mental accounting indicating high and low net worth individuals differed in the number of separate asset accounts, debt aversion and expertise in converting income into less liquid current and future assets. These findings point toward an expanded role for mental accounting in interdisciplinary research, financial education, and national saving programs.
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