The Tragedy of Impulse Saving

As any reader of this blog knows, I enjoy nothing more than tweaking the nose of personal finance conventional wisdom. Well, joy of joys, yesterday’s New York Times had an article, in the science section no less, that spits in Reading_glasses Cropconventional wisdom’s face, knees it in the groin and then kicks it as it rolls on the ground.

The piece discussed the work of Ran Kivetz and Anat Keinan, two professors of marketing from Columbia and Harvard Business Schools respectively. (Marketing professor is, incidentally, the same line of work as the authors of The Millionaire Next Door.)  They have discovered a new malady to avoid: saver’s remorse.  It’s just what it sounds like: that sad feeling you get with money in your pocket that you could have spent in some enjoyable way but, in a moment of weakness, chose to save.

This is just so awesome.

The sober professors don’t call it saver’s remorse.  I think John Tierney, The Times’ science guy, came up with that.  They use the term hyperopia, literally excessive farsightedness.  Sufferers of hyperopia “deprive themselves of indulgence and instead overly focus on acquiring and consuming utilitarian necessities, acting responsibly, and doing ‘the right thing.’” (K&K 2006 p.274)

Saver’s remorse (hyperopia) is the logical counterpart to buyer’s remorse (myopia).  Just as you might grow to regret that impulse purchase over time, the research shows that a person can grow to regret not grabbing immediate gratification.  Kivetz and Keinan asked college students right after winter vacation if they wished that they had spent more time studying or partying over the break.  Studying won.  Then they asked them the same question about the break the year before, and regrets about not studying more and not partying more were tied.  And when the researchers asked a group of alums back on campus for their 40th reunion, regrets about not partying enough won in a landslide.

Like most good social science research, once you read this it suddenly seems awfully obvious.  I’m only about halfway to my 40th, but in hindsight I really wish I had adjusted the beer/grades ratio in college more in favor of beer.  And there’s the old adage, with some truth to it, that nobody on their deathbed ever wished they had spent more time at the office.

It turns out that at some level we know we can be irrational in a hyperopia way and so sometimes act irrationally to counteract it.  In a paper that Kivetz wrote with Itamar Simonson of Stanford, test subjects were asked to choose between two possible raffle prizes, for example $100 cash or a romantic dinner for two costing $90.  Even though a winner of the money could just buy the dinner and pocket $10, many (about 24%) chose the dinner option anyway.  Why?  Because they knew that if they got the money they would just save it and then regret not going to the restaurant later on.

This research makes me grin from ear to ear. (Seriously, I think I may have pulled a muscle.  I guess I should have warmed up first.  I’m a little out of practice.)  Just about all personal finance advice, from Suze Orman and Dave Ramsey down to the most obscure frugality blog, takes as a given that spending myopia, the tendency to buy too much stuff for immediate enjoyment rather than save, is inherent to the human condition.  Not so.

Don’t get me wrong, I’m not saying that myopia isn’t common, or even that it isn’t more common than hyperopia.  I bet somewhere there is a study where way more than 24% of people chose, for example, a savings bond worth $90 over $100 in cash as a possible raffle prize. David Bach has sold millions of books that basically explain how to make exactly that sort of irrational choice, so there must be a lot of myopics out there.

But they are not everybody, and possibly not even the majority.  (There must exist a third group, the 20/20s, who don’t systematically regret either spending or saving later on.)  Myopics are much higher profile than hyperopics, and are much more likely to seek help, because spending myopia has the obvious result of financial distress.  Spending hyperopia, on the other hand, results only in wistful old people.

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