The Role of Savings Goals in the Prediction of Personal Spending Johanna Peetz and Roger Buehler Wilfrid Laurier University Peetz & Buehler (in press), PSPB

Spending predictions Past research on spending Spending behavior e.g., Furnham, 1999; Kidwell et al., 2003; Lee & Ariely, 2006; Vohs & Faber, 2007 Corporate forecasts e.g., Flyvberg et al., 2009; Schwartz & Cohen, 1995 Past research on predictions Predictions are often optimistically biased e.g., Armor & Taylor, 1998; Dunning, 2007 Time spent on projects is underestimated →”planning fallacy” e.g., Buehler et al., 1994, 2002; Kahneman & Tversky, 1979

Goals and Predictions Two theories of goals affecting predictions Motivated reasoning (Kunda, 1990) Desirability bias (Krizan & Windschitl, 2007) Goals affecting behavior? Increased commitment (Locke & Latham, 1990) Corresponding plans (Gollwitzer, 1999) Goals and intentions affect predictions more than behavior (Buehler et al., 1997; Epley & Dunning, 2000, 2006) e.g., donating blood (Koehler & Poon, 2006)

Savings goals Preference to minimize expenses and keep expenditures under control Savings goals should have a greater impact on predicted than actual spending Self-control (Faber & Vohs, 2004; Rabinovich & Webley, 2007) Multiple competing goals

Present Research HYPOTHESES People underestimate personal spending Savings goals contribute to this bias The more people want to save the more they predict to reduce their spending But wanting to save money might not translate into behavior

Study 1 – Is there a bias? “all expenses included except large sums that would occur only once a month, such as rent” Predicted spending in the next week Recalled spending of past week Recalled spending of past week: Actual Spending Predicted spending in the next week TIME 1 TIME 2 31 undergraduate students

Study 1 – Is there a bias? * * * Spending in $ Past (Week 1) Predicted (Week 2) Actual (Week 2) Predicted (Week 3)

Study 2 – The Role of Savings Goals Rated saving goals and other money attitudes Recalled spending of past week TIME 1 TIME 2 30 undergraduate students Predicted spending in the next week Every night, listed spending of past day: Σ 7 days = Actual Spending DIARY

Study 2 – The Role of Savings Goals ** PredictedActualRemembered Spending in $

Study 2 – The Role of Savings Goals -.38* Predicted Spending -.07“Saving money is important to me” Actual Spending * p <.05

M = 48 days later Study 3 – Ruling out Demand Rated savings goals and other money attitudes TIME 1 TIME 2 88 undergraduate students Predicted spending in the next week Goal reminder condition Rated savings goals No reminder condition -- Vs.

Study 3 – Ruling out Demand -.37* -.32* Predicted Spending --Time 2 Saving goals -.40* Time 1 Saving goals Goal reminder condition No reminder condition * p <.05 Average predictions did not differ significantly by condition

Study 4 - Manipulating Savings Goals 56 undergraduate students People who spend money are generally more successful in life. e.g., Spending money is just one indicator of a spontaneous approach to life, which is linked to career success. People who save money are generally more successful in life. e.g., Saving money is just one indicator of a future oriented approach to life, which is linked to career success. Strong Saving GoalWeak Saving GoalVs. Recalled actual spending in the week TIME 1 TIME 2 Predicted spending in the next week

Study 4 - Manipulating Savings Goals Strong Saving Goal Weak Saving Goal Spending in $ **

Rated the reason for their prediction (7-point scales): Thoughts about saving goals Thoughts about feelings about the friend Instances outside savings goals: Study 5 - Spending money on friends Identified a friend’s birthday coming up in the next 2 month TIME 1 38 undergraduate students Predicted spending for this birthday Recalled usual spending for birthdays Recalled past spending for this friend’s birthday

* Birthday Spending $ Usual Past Predicted * Instances outside savings goals: Study 5 - Spending money on friends

Thoughts about saving goals -. 50* Spending Prediction Thoughts about saving goals -.15 Thoughts about feelings for friend.46* ** Instances outside savings goals: Study 5 - Spending money on friends Compare to a separately collected sample predicting weekly spending:

Conclusions and Implications People routinely underestimate future spending Contributes to literature on money vs. time accounting Leclerc et al., 1995; Okada & Hoch, 2004; Soman, 2001 “Budget fallacy” similar to “Planning fallacy” The goal to save money amplifies the optimistic spending bias Poor predictions may lead to poor budgeting decisions Ironically, those individuals who are most motivated to improve their finances, may generate the worst financial plans!

Future directions and current studies Cognitive mechanisms Knowing items (i.e., “unpacking”) Knowing prices Construal level Different prediction objects Monthly and daily time periods Event spending

Thank you Questions and Comments?