Now, a team of American and Canadian economists have proposed a new explanation for the declining savings rate, one rooted in individual psychology. At its heart lies a simple observation: Personal spending is a lot more visible to others than no spending. Changes in the media landscape have made other people’s spending more visible than ever. That, in turn, is making all of us spend even more — and save even less.
“A boat parked in a driveway draws the attention of neighbors more than the absence of a boat,” the economists explain. “Similarly, it is more noticeable when a friend or acquaintance is encountered eating out or reports taking an expensive trip than when not, or buys an enjoyable product as compared with not doing so.”
These signals from other people are particularly powerful in part because many of us have considerable uncertainty about how much we should be spending. “There is a great deal of evidence suggesting that people are indeed often ‘grasping at straws’ in their savings decisions, which suggests that they may look to social cues for help,” the authors write.
David Hirshleifer, one of the authors, said via email that “saving is the flip side of consuming, and it’s tempting to think that you’re saving enough because you are not throwing lavish parties or taking expensive cruises the way some people you know are.” But, he warns, “such self-congratulation is treacherous, because those cruises and parties may not really be typical of your acquaintances — they just stand out in memory.”
Fifty years ago, our frames of reference for our spending habits were relatively small. We had our neighbors and friends, of course, as well as people we interacted with at work. But that has all changed. Television brought us things such as “Lifestyles of the Rich and Famous,” the Home Shopping Network and eventually reality TV shows where contestants are jetted off to tropical islands to enjoy expensive meals.
Next came the Internet, with the discussion forums and specialist websites, where postings about cool new product purchases “are more interesting, and therefore more likely to occur, than a posting to announce the news that the individual did not buy anything today," as the authors tell it.
Now we have social media. We can log on to watch kids unbox expensive toys on YouTube. Facebook lets us stay in touch with our rich college classmates who always seem to be on vacation. We can create and share detailed logs of the stuff we consume on sites such as Yelp and TripAdvisor. We can see what our co-workers ate last night on Instagram.
On social media, as the authors tell it, “a posting about a consumption event triggers a notification to friends; a non-posting about not engaging in a consumption event does not.”
The net effect of this saturation of consumptive media is that we’re bombarded every day with signals to consume, consume, consume — and that’s before you even stop to consider the rise of an entire industry, advertising, devoted to parting consumers from their money. “People infer that low saving is a good idea,” as the authors put it.
They spend a good deal of their paper developing a sophisticated mathematical model to explain exactly how this process of consumption contagion works. One of the implications of their research is that finding ways to make non-spending more visible might help people develop more realistic views of overall spending and saving behavior.
“To decide if you’re overconsuming, make a special effort to notice when your friends do something that is frugal, such as having a staycation or holding on to their 15-year-old car,” Hirshleifer said. “If you’re going to compare yourself to others, try to make it realistic.”