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Households Saving and Reference Dependent Changes in Income and Uncertainty

Lee, Jae Min
http://rave.ohiolink.edu/etdc/view?acc_num=osu1408967943

Abstract Details

2014, Doctor of Philosophy, Ohio State University, Human Ecology: Family Resource Management.
With increasing income uncertainty during the Great Recession, many households might have had difficulty in projecting future income changes. Ideally, a household should consider lifetime wealth and the distinction between transitory and permanent income changes in making saving decisions, but during the Great Recession it was probably very difficult for households to identify which income changes were transitory. Gain-loss utility based on prospect theory assumes that household inter-temporal decisions are determined not only by current or permanent income but also by their own expectations or assessment about income and income uncertainty in the first period. In this study, how households’ perception of their past and future income compared to reference points in the first period and how households’ perception of their income uncertainty change affect saving decisions in the second period and between the periods were examined with estimates of future income change. Saving decisions were tested based on relative gain and loss utility using loss aversion theory of consumption and a two period model. Possible asymmetric saving responses between positive and negative changes in reference dependent income and uncertainty were also analyzed. The 2007 and 2009 Survey of Consumer Finances (SCF) panel dataset was used. Both total and subsamples were analyzed based on the expected income change measure to identify possible asymmetry of saving in response to a set of reference dependent income and uncertainty variables, such as deviation from normal income, expected income change, and income uncertainty change, as well as the effect on saving measured in two ways, savings between 2007 and 2009 and whether or not saved in 2009. This study found a set of reference dependent income and uncertainty variables had significant effects on saving decisions of households and asymmetric saving responses between negative and positive changes in those variables. Households with a negative deviation from normal income or expected income change had smaller savings between 2007 and 2009 and less likelihood of saving in 2009 than households with a positive deviation from normal income or expected income change. For income uncertainty, those differences were identified in stayed negative income uncertainty and stayed positive income uncertainty compared to decreased income uncertainty as well as between stayed positive and stayed negative income uncertainty. The results provide weak empirical evidence consistent with loss aversion theory. The findings were not explained by classical theories such as the life cycle hypothesis (LCH) and the permanent income hypothesis (PIH), which do not include asymmetric saving responsesor the influence of reference dependent income and uncertainty variables on saving decision. This study contributes to an extension of the discussion of saving by diversifying measures and estimating asymmetric saving responses to assessments of past income and income uncertainty change as well as expectations about future income change. The findings provide insights for financial planners, educators, and policy makers to improve saving decisions.
Kathryn Stafford (Advisor)
Sherman Hanna (Committee Member)
Robert Scharff (Committee Member)
176 p.
Home Economics
gain-loss utility; loss aversion; prospect theory; reference dependent change; relative change; asymmetry; asymmetric response; risk taking; saving; great recession; survey of consumer finances; scf;

Recommended Citations

Citations

  • Lee, J. M. (2014). Households Saving and Reference Dependent Changes in Income and Uncertainty [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1408967943

    APA Style (7th edition)

  • Lee, Jae Min. Households Saving and Reference Dependent Changes in Income and Uncertainty. 2014. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1408967943.

    MLA Style (8th edition)

  • Lee, Jae Min. "Households Saving and Reference Dependent Changes in Income and Uncertainty." Doctoral dissertation, Ohio State University, 2014. http://rave.ohiolink.edu/etdc/view?acc_num=osu1408967943

    Chicago Manual of Style (17th edition)

osu1408967943
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This open access ETD is published by The Ohio State University and OhioLINK.