Expense neglect in forecasting personal finances

Abstract

This article examines how consumers forecast their future spare money, or "financial slack." Although consumers generally think that both their income and expenses will rise in the future, they underweight the extent to which their expected expenses will cut into their spare money, a phenomenon the authors term "expense neglect." The authors test and rule out several possible explanations for this phenomenon and conclude that expense neglect is due in part to insufficient attention toward expectations about future expenses relative to future income. "Tightwad" consumers, who are chronically attuned to costs, show less severe expense neglect than "spendthrifts," who are less attuned to costs. The authors further find that expectations regarding changes in income (and not changes in expenses) predict responses to the Michigan Index of Consumer Sentiment, a leading macroeconomic indicator. Finally, the authors conduct a meta-analysis of their entire file drawer (27 studies, 8.418 participants) and find that (1) across studies, participants place 2.9 times greater weight on income change than they do on expense change when forecasting changes in their financial slack, and (2) expense neglect is stronger for distant than for near-future forecasts.