The Influence of Future Income on Present Spending: Self-Continuity Facilitates Consumption Smoothing
61 Pages Posted: 6 Sep 2017
Date Written: August 31, 2017
According to economic theory, consumers should boost present consumption when anticipating an income increase and reduce consumption when anticipating a decrease. Yet, many studies have observed a lack of such consumption smoothing. We investigate a psychological factor that can predict when consumers will adjust their current consumption to future income changes: self-continuity, or a sense of identification with and connection to the circumstances of the future self. We propose that consumers tend to perceive lower self-continuity when anticipating an income increase compared to a decrease. Consistent with this notion, we show that consumers are less likely to adjust present discretionary spending upward when anticipating an income increase than to adjust spending downward when anticipating an income decrease. Further, manipulations of self-continuity mitigate the asymmetry: when we induced high self-continuity, consumers adjusted spending to both future income increases and decreases, and when we induced low self-continuity, consumers adjusted present spending neither to future income increases nor to decreases. This demonstrates the role of self-continuity above and beyond other factors potentially contributing to the asymmetry, such as loss aversion and diminishing marginal utility. Six studies involving scenarios as well as real income expectations and behavior support the notion that consumers are more likely to smooth consumption when they perceive a higher sense of self-continuity.
Keywords: financial decision making, self-continuity, future income, consumption smoothing, discretionary spending
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