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Self-control and loss aversion in intertemporal choice

[journal article]

Selart, Marcus; Karlsson, Niklas; Gärling, Tommy

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Abstract The life-cycle theory of saving behavior (Modigliani, 1988) suggests that humans strive towards an equal intertemporal distribution of wealth. However, behavioral life-cycle theory (Shefrin & Thaler, 1988) proposes that people use self-control heuristics to postpone wealth until later in life. According to this theory, people use a system of cognitive budgeting known as mental accounting. In the present study it was found that mental accounts were used differently depending on if the income change was positive or negative. This was shown both in a representative nationwide sample of households and in a student sample. Respondents were more willing to cut down on their propensity to consume when faced with an income decrease than to raise it when the income increased. Furthermore, contrary to the predictions of behavioral life-cycle theory, it was found that the respondents adjusted their propensity to consume the most when the income increases or decreases took place immediately. Hence, it is suggested that theories of intertemporal choice (e.g., Loewenstein, 1988; Loewenstein & Prelec, 1992) provide a better account of the data than does the behavioral lifecycle theory.
Keywords self-control; savings; behavior; life cycle; behavior theory; income; consumption behavior; consumption theory; prosperity
Classification Social Psychology; Sociology of Economics
Document language English
Publication Year 1997
Page/Pages p. 513-524
Journal Journal of Socio-Economics, 26 (1997) 5
ISSN 1053-5357
Status Published Version; peer reviewed
Licence Creative Commons - Attribution-ShareAlike