I recently read an article in the Zambia Daily Mail Newspaper, written by Maxwell Phiri. The article highlighted the alarming poor culture of saving among Zambians – where less than 50% of people save, countrywide.
As a result of not saving we have seen some people failing to maintain their usual lifestyle after retirement. In some cases, people who were once successful have ended up in poverty or died earlier, instead of enjoying the fruits of many years of hard work – due to lack of preparation for rainy days. Households where this has happened have run the risk of getting trapped into a cycle of poverty.
Concerns on saving behaviour are not only peculiar to Zambia. Supposedly highly enlightened countries such as the US also struggle with it. People are found not to increase saving even in times of low unemployment rate and rising wages – according to a survey done in 2018. This probably gives us a hint that knowledge alone cannot improve our saving behaviour.
As a behavioural economist, by preference, I often start by looking at the framework that standard economists (popularly known as economists) would use to address such an issue, before I delve into behavioural economics prescriptions.
Well, persons that have gone through economics graduate school would have been taught by their professors that for all practical purposes, they must assume that people always act/behave rationally.
What this entails is that, if you ask an economist to give advice on savings or predict the saving behaviour of people, they will say that people save the right amount.
In other words, according economists people optimize, they figure out how much they are going to make over their lifetime, what rate of return they are going to get on their investments. They choose an optimal consumption path – figure out how much they will consume now, and how much to leave to consume when they are old.
If indeed what economists are taught and their models were useful in all practical purposes, then we wouldn’t have only less than 50% of Zambians saving.
What economists are taught is useful only as far as demonstrating what a good decision (optimal) is supposed to look like. However, a different scientific approach is needed to answer challenges about how humans actually make decisions – and that’s where behavioural economics comes in.
Before going into ways that can help to encourage saving behaviour, I would like to briefly use some behavioural insights to highlight some of the reasons why people don’t save.
- Optimism bias: We humans have the tendency of overestimating the likelihood of favourable future outcomes and to underestimate the likelihood of unfavourable future outcomes. Such a bias may cause us to postpone saving. In fact, this bias confronts us in many aspects of life, such as buying insurance, working on a project etc.
- Often times, people cite low earnings to be the barrier to saving. This may not be a winning argument all the time. A behavioural economics intervention that was implemented in the US resulted in increased saving behaviour among poor people, as much as rich people. Nevertheless, another reason why some people fail to save is because they don’t set clear savings goals or choose a saving number to aim at. There is a psychological explanation to this. Abstract goals are the most difficult to pursue, because they make it hard for people to develop a plan of action – leading people to procrastinate or avoid them.
- Present bias: Humans attach less importance to benefit or cost choices that happen in the future compared to those that happen in the present, contrary to economists’ predictions that people’s choice preferences are stable and time consistent. What this entails is that since retirement benefits seem like distant milestones, people are more likely to prioritize nearer goals like paying students loans (ages 20s & 30s), saving for children’s university (age 40s), discretionary purchases like vacations (age 50s). This does not mean that people do not know about the need to save for retirement. Studying how humans make their actual decisions can show how biases affect decisions of this nature.
- Finally, many people tend to have the belief that savings will grow linearly. They don’t appreciate the power of compounding – thereby underestimating how much their current savings will be worth in the future. Present bias is partly a contributing factor to this judgment.
The next article will be about nudging people to save more. Nudge is a popular term in behavioural economics. It simply refers to cheap and easy to implement interventions, which nevertheless have massive effects on people’s economic, corporate, social or political behaviours.
About the author
Stanford Cheelo Mujuta
Applied Behavioural Economist
Offers consultancy to Businesses, Governments & NGOs
Contact stanford.mujuta@fizambia.com or mujutasc@yahoo.com
