DISQUS

Knud · 1 year ago

Friedman would worship at my feet according to this logic...

I love it when I discover economic theory that supports what I've been doing all along, but I see your point on confidence bias.

While I've had your blog in my Google reader for a while, this is my first comment so I'll take the opportunity to thank you for good reading and I have no clue what separates a verified post from an unverified or what the smiley is.

Please say hi to my former intern colleagues from me and tell them I'm disappointed none of them will join me at Freedomfest

DWAnderson · 1 year ago

It seems like there are also a few good arguments for ratcheting up consumption over your lifetime rather than trying to smooth it: (i) your life gets better as time passes, leading to a satisfaction that comes from thinking you are making progress; (ii) having eaten Ramen when young, you appreciate better means later in life; (iii) if you are wrong (or even suffer from short term liquidity problems), the the pain of having to adjust to lower consumption is likely to be worse than foregone pleasure of greater consumption; and (iv) as discussed on one of your Free Will BloggingHeads episodes, one of the big advantages of greater wealth is greater financial security, an advantage that pursuing a consumption smoothing strategy significantly reduces.

UserGoogol · 1 year ago

Another more-or-less related factor is that debt has to be repaid whereas savings don't actually have to be spent, and as such debt has more of an impact on a person's options. For instance, if you decide you want to be a wandering hobo or something you can't do that if you have an obligation to repay your debts. (Or to a lesser extreme, you might feel pressured to take a job you're not totally fond of because you need the money.) So you not only have to worry about accurately predicting your potential future income, but also accurately predicting your future preferences.

(Although I suppose oversaving can have restricting consequences too if all that ramen causes long-term health problems or something.)

Nicholas Weininger · 1 year ago

But in some sense debt doesn't have to be repaid, right? Not under modern bankruptcy law regimes, anyway. You can declare bankruptcy and walk away from most debt if things go sour, at the cost of severely limiting your subsequent access to credit. Which might be worth risking, if the probability of having to declare bankruptcy is sufficiently small and the process of repairing your credit post-bankruptcy sufficiently feasible.

DWAnderson · 1 year ago

Contra to my earlier response see http://blogs.wsj.com/wealth/2008/07/07/splurgin...

cspice · 1 year ago

I think you are exactly right when you say that uncertainty about lifetime income prevents optimal spending habits. It just doesn't feel safe to spend beyond your means when there is no guarantee of future income.

In general, there are two counterbalancing factors. One is that high spending has high rewards and is often more manageable than people expect. The other factor is that saving leads to non-linear returns (such as compound interest) which can eventually have a significantly bigger net impact than the original money.