Control thyself: Self-control failure and household wealth

Abstract

In recent years, economic research has pointed out that self-control is a highly relevant concept for the study of household financial behavior. A number of studies find strong relationship between measures of self-control on the one hand and low saving rates or over-indebtedness of households on the other. These studies define self-control as the ability to resist temptation and provide theoretical justification and empirical evidence for its importance.In this paper we employ a more comprehensive definition of self-control than the one usually used in the literature. This definition (proposed by psychology Professor Roy Baumeister) puts forward the idea that the strength of self-control depends crucially on three fundamental behavioral characteristics, referred to as ingredients of self-control. They consist of the ability for goal-setting, monitoring and commitment to earlier set goals. The theory suggests that strong self-control is exhibited by people who set long-term goals (e.g. lose 10kg of body weight), keep track of the relevant behavior (e.g. regularly measure their weight and calorie intake), and have the ability to commit to earlier set goals (e.g. resist a more delicious meal that would jeopardize their effort). Importantly, failure of any of the three ingredients causes selfcontrol to fail.We ask what the relationship between self-control failure and measures of household wealth is. To address this question, we use the Health and Retirement Survey, a standard dataset of US households aged 50 and above, which provides wealth information and a wide range of important household characteristics like age, education, health status, income etc. Crucially, the survey contains questions that allow us to measure all three ingredients of self-control and construct an overall measure of self-control failure.Our findings, in line with existing studies, suggest that households that exhibit self-control failure have disproportionately low net worth. This result is present for a wide range of the wealth distribution but is stronger for more affluent households. Furthermore, self-control failure is strongly associated with lower levels of liquid, financial wealth, whereas the results on illiquid, real wealth are much weaker. This is compatible with the idea that conspicuous consumption is more likely to be financed by liquid than by illiquid wealth. Furthermore, we find a positive relationship between self-control failure and the probability of facing financial distress. Finally, we show that each individual ingredient of self-control, i.e. goal-setting, monitoring, and commitment, contributes quantitatively to this result.Treating self-control as the result of these ingredients could leave room for enhancement, through appropriate financial literacy and related initiatives. In any case, it provides additional justification for existing policies: Financial education is important, not only because learning how to plan is necessary to quantify the goals of the household, but also because a household with a plan is l...

Procrastination and Personal Finances: Exploring the Roles of Planning and Financial Self-Efficacy

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“…8 However, even in countries where, historically, contributing to funded pensions has been voluntary, automatic enrolment has started to gain ground, with the aim of offsetting the resistance of individuals with regard to retirement savings and of increasing savings rates. Biljanovska and Palligkinis (2017) strongly support the idea of automated transfers to saving accounts as a valuable tool for helping households commit to the plans they themselves have made. They also argue that providing households with adequate and comprehensible financial information is important for households' financial planning, as it supports their ability to plan, monitor and commit to pre-set goals.…”

“…Moreover, they assert that it is important that individuals are taught how to plan, as the ability to plan is essential in setting goals and achieving them. Biljanovska and Palligkinis' (2017) research provides a valuable extension to the earlier research on how to motivate individuals to save for old age and how effective the chosen methods are. For instance, Madrian and Shea (2001) document that automatic enrolment significantly increased the rates of participation in 401(k) schemes.…”

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