1. Can Psychology improve our Understanding of Puzzles of Intertemporal Consumption at the Macroeconomic Level? Remarks about the Brazilian Case Roberta Muramatsu and Patricia Fonseca Universidade Presbiteriana Mackenzie - São Paulo – Brasil IBMEC Business School, São Paulo – Brasil

2. The purpose of the study To investigate whether and how behavioral concepts improve our understanding of some intertemporal consumption puzzles that persist at the macroeconomic level. To investigate whether and how behavioral concepts improve our understanding of some intertemporal consumption puzzles that persist at the macroeconomic level. Focus on three anomalies of intertemporal consumption decisions detected in Brazilian macroeconomic life. Focus on three anomalies of intertemporal consumption decisions detected in Brazilian macroeconomic life.

3. The puzzles 1) Increasing private savings in the highly inflationary economic environment at the end of the 1980’s. 1) Increasing private savings in the highly inflationary economic environment at the end of the 1980’s. 2) A significant drop of private savings rates in 1990 that gave rise to low savings pathway even in moments of increased income levels 2) A significant drop of private savings rates in 1990 that gave rise to low savings pathway even in moments of increased income levels 3) The persistent increase in private consumption and overindebtedness in a stable macroeconomic scenario offering concrete possibilities for improved consumption plans. 3) The persistent increase in private consumption and overindebtedness in a stable macroeconomic scenario offering concrete possibilities for improved consumption plans.

4. The data – how the anomalies were detected? We we embarked on an empirical analysis of private consumption and private savings time series from 1981 to 2007. We we embarked on an empirical analysis of private consumption and private savings time series from 1981 to 2007. The levels of income, interest rates and inflation were regarded as macroeconomic incentives shaping actual intertemporal consumption decisions. The levels of income, interest rates and inflation were regarded as macroeconomic incentives shaping actual intertemporal consumption decisions. The three puzzles represent behavioral patterns that cannot be accounted for in terms of the (objective )macroeconomic incentives posed by the environment. The three puzzles represent behavioral patterns that cannot be accounted for in terms of the (objective )macroeconomic incentives posed by the environment.

5. First Puzzle – end of 1980´s

6. First Puzzle Context Slight Decrease in Private Consumption rates Slight Decrease in Private Consumption rates Low investment rates Low investment rates Extremely low GDP growth rates Extremely low GDP growth rates Ineffective inflation stabilization policies Ineffective inflation stabilization policies Decreasing Public sector savings rates Decreasing Public sector savings rates Decreasing GDP per capita rates (Income levels) Decreasing GDP per capita rates (Income levels) High uncertainty levels High uncertainty levels Full indexation of all prices and contracts Full indexation of all prices and contracts

7. How Psychology help understand the puzzle Persistently high inflation -> decreases economic oportunities and well-being -> uncertainty Persistently high inflation -> decreases economic oportunities and well-being -> uncertainty Under the high uncertainty levels of that time concepts of loss aversion, projection bias and dread effect help us to better understand the increasing private savings rates. How? Under the high uncertainty levels of that time concepts of loss aversion, projection bias and dread effect help us to better understand the increasing private savings rates. How? “Will I be able to maintain my consumption profile?” -> visceral factors as fear and anxiety biases future projetions -> bad economic prospects trigger loss aversion and dread effect -> “The agent doesn’t want wait for the worst” -> Precautionary savings “Will I be able to maintain my consumption profile?” -> visceral factors as fear and anxiety biases future projetions -> bad economic prospects trigger loss aversion and dread effect -> “The agent doesn’t want wait for the worst” -> Precautionary savings

8. The second puzzle - 1990

9. Second Puzzle Context Another unsuccessful Brazilian price stabilization program - Collor Plan I. Another unsuccessful Brazilian price stabilization program - Collor Plan I. Price instability Price instability Attempts to price controls (freeze) Attempts to price controls (freeze) Little efforts of adjustment of public sector debts Little efforts of adjustment of public sector debts Confiscation of agents’ financial assets (approximately 70% of all banking goods and individual assets) Confiscation of agents’ financial assets (approximately 70% of all banking goods and individual assets)

10. Can Psychology improve our understanding of the Second Puzzle? Constraints on Precautionary savings -> option for “liquidity” Constraints on Precautionary savings -> option for “liquidity” The loss averse agent faced his worse nightmare -> the confiscation by government of part of his wealth allocated in financial assets The loss averse agent faced his worse nightmare -> the confiscation by government of part of his wealth allocated in financial assets “Why should I save, if there’s no guarantee for tomorrow?” -> possibility of new confiscation/freeze were implicit -> this institutional change gave incentives to adaptation of present biased preferences “Why should I save, if there’s no guarantee for tomorrow?” -> possibility of new confiscation/freeze were implicit -> this institutional change gave incentives to adaptation of present biased preferences

11. Third Puzzle – after especially 2000

12. Third Puzzle Context Price stability since 1994 Price stability since 1994 High interest rates (27% per year in 1998) High interest rates (27% per year in 1998) Increase in income levels Increase in income levels Mass introduction of Financial innovations (as credit cards) Mass introduction of Financial innovations (as credit cards) Increase in Consumer Credit Operations (Credit Card and Overdraft) Increase in Consumer Credit Operations (Credit Card and Overdraft) Increase in Credit Card and Overdraft Defaults Increase in Credit Card and Overdraft Defaults

13. How Psychology adds to understanding of the Third Puzzle Financial Innovations -> liquidity excess Financial Innovations -> liquidity excess Agents were already showing present biased preferences since 1990 -> room for development of hyperbolic discounting Agents were already showing present biased preferences since 1990 -> room for development of hyperbolic discounting Agents are not severely budget constrained anymore -> “So I don’t need to wait to buy what I want now” -> great temptation and consumption- > self control problems and the agent´s inability to stick to his long term plans. Design of commitment strategies needed Agents are not severely budget constrained anymore -> “So I don’t need to wait to buy what I want now” -> great temptation and consumption- > self control problems and the agent´s inability to stick to his long term plans. Design of commitment strategies needed

14. Cognition and Emotion in the economical incentive´s perception Increasing savings in 1980´s and increasing consumption profiles after especially 1995 – an apparent paradox? Increasing savings in 1980´s and increasing consumption profiles after especially 1995 – an apparent paradox? Resolved, if we consider that cognition and emotion together shape perception of available incentives associated with immediate and future consumption. Resolved, if we consider that cognition and emotion together shape perception of available incentives associated with immediate and future consumption. Episodes in which emotions spoke louder to agents than higher order cognition -> patterns of behavior unexpected by traditional choice theory Episodes in which emotions spoke louder to agents than higher order cognition -> patterns of behavior unexpected by traditional choice theory

15. Conclusion and Further research The behavioral concepts can be useful to understand puzzles of macroeconomic life -> a chance for explanatory and predictive progress The behavioral concepts can be useful to understand puzzles of macroeconomic life -> a chance for explanatory and predictive progress Cognition and emotional aspects should be incorporated into explanations of consumption/savings decisions. Cognition and emotional aspects should be incorporated into explanations of consumption/savings decisions. Coming soon: experiments and econometrical exercises in order to corroborate some of our schematic accounts Coming soon: experiments and econometrical exercises in order to corroborate some of our schematic accounts