Thursday, July 17, 2008

Economists on economizing

Which is very different from maximizing wealth. Alex Tabarrok tells us to spend more today

Over confidence and in particular the idea that we are special and will live a long life suggests the error is saving too much. Note that we also tend to think that our partner will be alive as well. My wife once asked me whether we were saving enough for "our" retirement. "Sure," I said, "don't forget one of us will probably die before the other and I'm not saving for your future husband." "Why," she replied with a sigh, "can't economists be more human?"

Availability bias probably also suggests we save too much - we see people who saved too little in the street but the ones who saved too much are dead and gone.


Kotlikoff's finding is that a large fraction of Americans, some 40%, are saving too much. Kotlikoff's program takes into account that we may need less wealth when we are old and retired (e.g. less transportation for work related reasons) but not that the marginal utility of wealth may be lower when we are old. (e.g. Money's not so valuable if you don't need it to or can't use it to attract a mate.) Thus over-saving may be even more common than Kotlikoff suggests.