Visibility Bias in the Transmission of Consumption Beliefs and Undersaving

63 Pages Posted: 23 Jun 2016 Last revised: 4 Dec 2018

See all articles by Bing Han

Bing Han

University of Toronto, Rotman School of Management

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Johan Walden

University of Lausanne; Swiss Finance Institute; University of California, Berkeley - Finance Group

Multiple version iconThere are 2 versions of this paper

Date Written: June 7, 2016

Abstract

We study how bias in the social transmission process affects contagion of consumption beliefs and behavior. In the model, consumption is more salient than non-consumption. This visibility bias causes people to perceive that others are consuming heavily and have favorable information about future wealth prospects. These inferences increase aggregate consumption. In contrast with other approaches, the visibility bias approach suggests that relatively simple disclosure policy interventions can ameliorate undersaving. In contrast with the Veblen wealth-signaling approach, information asymmetry about wealth reduces overconsumption. Our approach offers new implications about the effects on saving of social connectedness, observation biases, and demographic structure; and offers a novel explanation for the dramatic drop in the savings rate in the US and several other countries in the last thirty years.

Keywords: visibility bias, overconsumption, saving, behavioral economics, social influence, social learning

JEL Classification: G11, G41, E71, E21

Suggested Citation

Han, Bing and Hirshleifer, David A. and Walden, Johan, Visibility Bias in the Transmission of Consumption Beliefs and Undersaving (June 7, 2016). Rotman School of Management Working Paper No. 2798638. Available at SSRN: https://ssrn.com/abstract=2798638 or http://dx.doi.org/10.2139/ssrn.2798638

Bing Han

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

David A. Hirshleifer (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Johan Walden

University of Lausanne

Lausanne, Vaud CH-1015
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of California, Berkeley - Finance Group ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 643-0547 (Phone)

HOME PAGE: http://www.haas.berkeley.edu/faculty/walden.html

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