Why Don’t People Save

Why Don’t People Why Don’t People SaveSave

• How many of you know that smoking is unhealthy?

• How many of you know people—even people your age—who smoke?

How many of you know that eating foods that are high in transfats, such as packaged cookies, and margarine isn’t healthy?

How many of you know people who eat foods that are high in transfats?

• How many of you know that regular exercise provides many health benefits?

• How many of you know people who don’t exercise regularly?

• If people know that certain behaviors are risky or unhealthy, why do they engage in those behaviors?

• If people know that something is good for them, why do they fail to engage in that activity or behavior?

Consider…..1. What are the benefits of eating a

healthful diet and exercising regularly?

2. Do these benefits occur now or in the future?

3. If people choose a healthful diet and exercise regularly are they guaranteed these benefits?

4. What are the costs of choosing a healthful diet and exercising regularly?

5. Do these costs occur now or in the future?

• Costs occur NOW

• Benefits occur LATER (if at all)

• Savings—income not spent on consumption or taxes1. What are the benefits of saving?

2. What are the costs of saving?

3. When do the benefits of saving occur?

4. When do the costs of saving occur?

Keeps us motivatedKeeps us motivated

What is the o.c. of saving?

1.2 Marginal Analysis

• Marginal Cost--giving a little (negative)

• Marginal Benefit—getting a little (positive)

• Economic choice is based on comparing expected marginal benefit to expected marginal cost

• A rational decision maker will change the status quo as long as the expected marginal benefit from the change exceeds the expected marginal costs.

• How do you decide that it is time to change the status quo??

Choice Requires Time and Information

• Both are scarce = Valuable

• Rational decision makers will continue to acquire information as long as the marginal benefit expected from that information exceeds the marginal cost of gathering it.