1. Finance for Normal People
Chapter 9: Behavioral life-cycle of saving and spending

2. Behavioral life-cycle of saving and spending
Portfolio theory is about the production of portfolios Life-cycle theory is about accumulation of assets into portfolios and decumulation from them

3. Behavioral life-cycle of saving and spending
Standard life-cycle theory
Our sole reason for saving is spending
We wants “smoothed” spending during our life-cycle
(More precisely, we want smoothed marginal utility of consumption and leisure during our life-cycle)

4. Behavioral life-cycle of saving and spending
Behavioral life-cycle theory
Our reasons for saving consist of wants for the full range of
utilitarian, expressive, and emotional benefits of wealth
(Wealth owning, rather than spending, also yields expressive and emotional benefits)

5. Behavioral life-cycle of saving and spending
2. Standard life-cycle theory
People need no tools and no help in resolving conflicts between wants for saving and spending

6. Behavioral life-cycle of saving and spending
2. Behavioral life-cycle theory
People reconcile the conflict between wants by:
Framing
Mental accounting
Self-control
Public policy also helps reconcile conflicts between wants

7. Behavioral life-cycle of saving and spending
The spending-sources and spending-uses pyramids

8. Behavioral life-cycle of saving and spending Figure 9-1a – Spending-sources pyramid

9. Behavioral life-cycle of saving and spending Figure 9-1b – Spending-uses pyramid
Major luxury and status items, such as luxury cars and jewelry   
Discretionary items such as recreation and travel
Necessities, such as food and shelter

10. Behavioral life-cycle of saving and spending
Self-control
Wants for spending can overwhelm wants for saving when self-control is weak

11. Behavioral life-cycle of saving and spending
Genetics account for approximately 1/3 of differences in saving behavior The effect of parents on their children’s saving behavior is strongest when children are in their 20s but disappears by middle age

12. Behavioral life-cycle of saving and spending
Personal Saving Orientation (PSO) is a measure of saving habit
People with high PSO tend to agree with statements such as:
“Putting money into personal savings is a habit for me”
“I usually save money without having a specific goal in mind”
People with high PSO find it difficult to break their saving habit

13. Behavioral life-cycle of saving and spending
Self-control
Conscientiousness is closely associated with self-control
Poverty undermines self-control
Self-control is bolstered by commitment

14. Behavioral life-cycle of saving and spending
Evidence about standard and behavioral life-cycle theories
The financial advising industry
Government saving and spending plans
Corporate saving and spending plans
Distinctions between capital and income

15. Behavioral life-cycle of saving and spending
Prescriptions of standard and behavioral life-cycle theories
Social security
Defined-benefit pension plans
Defined-contribution retirement saving plans
Annuities (and the annuity puzzle)
Information about sustainable withdrawals

16. Behavioral life-cycle of saving and spending
Financial literacy Financial comprehension Financial behavior

17. Behavioral life-cycle of saving and spending
Standard and behavioral life-cycle theories in public policy
Libertarian hands-off
Libertarian-paternalistic nudges (Voluntary)
Paternalistic shoves (Mandatory)

18. Behavioral life-cycle of saving and spending
Retirement income for the wealthy, middle-income, and poor
Wealthy
Steady-middle
Precarious middle (low-earners and high-spenders)
Poor