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Saving self control: A behavioral approach to analyze why individuals save and what prevents them from doing it well

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  1. Evolution of Life-Cycle Savings
  2. Commitment Devices
  3. Personal Savings Crisis
  4. Increasing Liquidity
  5. Irresponsible Investors

How and why consumers and investors save, has remained as a puzzle since modern economists approached the question. Clearly, we save because we have to, but we rarely ever want to save as an end in and of itself. Current the leading models present this dilemma as a struggle between two personal selves: a present self who wishes to consume and a future self who relies on prior savings. This paper will attempt to survey various approaches that attempt to reconcile this dual-self dilemma, explain what causes us to save, and discuss why it is becoming increasingly important to start taking saving seriously.

[...] This mentality has shifted the U.S.'s ballooning asset bubble from stocks to homes, and Shiller points out that this is, in fact, a common historical pattern. What is different now, however, is that investors are increasingly able to tap into their home equity thanks to the innovation and widespread extension of home equity loans and home equity lines of credit. These financial products have added to the movement towards perfectly liquid markets, and I will return to them in the next topic of discussion. [...]

[...] Personal Savings Crisis The personal savings rate measures savings as a share of disposable income, and it has been falling dramatically in the United States since the early 1980s. This trend is of central importance to the issue of self- control because it calls empirical attention to the fact that we are not, by any means, adhering to the neoclassical life-cycle model of savings. Thaler (1994) highlights the absurdity of the conclusion that the life- cycle hypothesis gives us, which is that ?undersaving is impossible.? On the contrary, the ageing baby-boomer generation is on the verge of retirement and thus we should expect greatly increasing savings rates if people were considered to be rational. [...]

[...] This interpretation suggests that our bodies have learned to value gratification today over gratification tomorrow simply because of the uncertainty associated with the interim period. Based on this observation, it is understandable that our species has grown to suffer from a self- control deficit. Perhaps in pre-capitalist times this was not nearly as much of an issue; human beings, who have lived a subsistence lifestyle for nearly the entirety of our existence, have not needed to worry very much about saving income for future periods. [...]

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