Expense Neglect in Forecasting Personal Finances

51 Pages Posted: 27 Dec 2014 Last revised: 17 Nov 2015

See all articles by Jonathan Berman

Jonathan Berman

London Business School - Department of Marketing

An Tran

University of La Verne - Department of Marketing

John G. Lynch

University of Colorado-Boulder, Leeds School of Business - Center for Research on Consumer Financial Decision Making

Gal Zauberman

Yale

Date Written: December 26, 2014

Abstract

This paper shows evidence for expense neglect in how consumers forecast their future spare money or “financial slack.” Even though people generally think that both their income and expenses will rise in the future, we find that they systematically under-weigh the extent to which their expected growing expenses will cut into their spare money (Studies 1-9). We rule out the possibility that these findings are due to: measurement error (Studies 2-5); a lack of confidence in estimating future expenses (Study 6); belief in greater flexibility of future expenses (Study 7); or a general optimism bias (Study 8). Study 9 shows that consumers who are chronically attuned to expenses (tightwads) are less likely to show expense neglect than those who are not (spendthrifts). Finally, we conduct a meta-analysis of our entire file-drawer (25 studies, 7,214 participants) and find that across all studies participants place about 2.7 times the weight on income change as they do on expense change when forecasting their financial slack, and that expense neglect is stronger for the distant than near future.

Keywords: Forecasting, Financial Slack, Financial Decision-Making, Expense Neglect

JEL Classification: M31, D81, D84

Suggested Citation

Berman, Jonathan and Tran, An and Lynch, John G. and Zauberman, Gal, Expense Neglect in Forecasting Personal Finances (December 26, 2014). Available at SSRN: https://ssrn.com/abstract=2542805 or http://dx.doi.org/10.2139/ssrn.2542805

Jonathan Berman (Contact Author)

London Business School - Department of Marketing ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

An Tran

University of La Verne - Department of Marketing ( email )

United States

John G. Lynch

University of Colorado-Boulder, Leeds School of Business - Center for Research on Consumer Financial Decision Making ( email )

Leeds School of Business
Boulder, CO 80309-0419
United States
919-971-5201 (Phone)

HOME PAGE: http://www.colorado.edu/business/john-g-lynch-jr

Gal Zauberman

Yale ( email )

165 Whitney Avenue
New Haven, CT 06511
United States

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