A Behavioral Perspective on Saving Decisions. Empirical Evidence for Policymakers in the European Union

Abstract

Evidence is mounting that individuals do not always behave as strictly 'rational' customers of the banking sector as neoclassical models of economics would assume. Instead, scholars and policymakers are increasingly arguing that behavioral economics offers a more useful and realistic means of understanding customer behavior in the real economy. Drawing on data from the first European Central Bank harmonized household survey at the European level and Eurostat, this paper develops a multilevel model to investigate how individuals actually save. We find evidence that loss aversion bias exists in saving behavior as regards an individual's current level of income, and that evidence of this effect is also supported at the country level. We also find strong evidence that socio-demographic factors and cross-country differences influence individuals' saving behavior. We argue that behavioral approaches canand shouldbe used to understand saving behavior of individuals, and that this insight should be used towards the ongoing quest to improve future banking practice and financial reform, particularly in the aftermath of the 2008 financial crisis. Policy Implications• Individuals' saving behavior responds more to declines than to increases in customers' current level of income. Therefore, policymakers should facilitate a framework in which losses become less salient, by prioritizing more the long-term benefits.• Findings show that loss aversion is smaller for those EU countries with a lower level of GNI per capita, such as Latvia, Hungary, Greece, Estonia, Portugal, Slovakia, and Cyprus. Incorporating evidence derived from EU countries into policy-making can help address the weaknesses associated with neoclassical approaches.• Individuals that are more educated, married and homeowners tend to save more than their counterparts. On the contrary, women, unemployed and individuals living in a large household tend to save less. Behavioral tools are especially recommended for individuals who are thought to be potentially 'vulnerable' customers.• EU countries such as Cyprus, Greece and Latvia exhibiting a smaller loss aversion are associated with negative saving rates.Financial policies which promote disclosure methods, such as targeting annual summaries, may be beneficial for customers in different EU countries to take their saving decisions.

Household savings and present bias among Chinese couples: A household bargaining approach

“…Ultimately, savings are not only a manifestation of one's ability to save, determined by the ratio of income and consumption, but also of an individual's consumption preferences and biases. While factors like incomes and rates of return play a crucial role in savings decisions, other factors such as individual behavior, preference, and bias make the outcome more complex (Clifton et al, 2020; NBER, 2016). Across studies, present bias is significantly associated with the lower retirement savings (Goda et al, 2019), higher credit card usage, reduced retirement planning, and current occupational decisions (Madrian & Shea, 2001).…”