1990/02/01 by Richard H. Thaler · 4 citations
Business, Management and Accounting · Economics, Econometrics and Finance · Social Sciences · #Financial Literacy, Pension, Retirement Analysis #Housing Market and Economics #Insurance, Mortality, Demography, Risk Management #Fungibility #Elegance #Victory #Economics #Life-cycle hypothesis #Mental accounting #Consumption (sociology) #Fallacy #Positive economics #Keynesian economics #Mathematical economics #Microeconomics #Politics #Sociology #Epistemology #Philosophy #Macroeconomics #Political science #Law #Social science
paper · pdf · doi:10.1257/jep.4.1.193
openalex publication_date 1990/02/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/21
Last New Year's day, after a long evening of rooting the right team to victory in the Orange Bowl, I was lucky enough to win 300 in a college football betting pool. I then turned to the important matter of splurging the proceeds wisely. Would a case of champagne be better than dinner and a play in New York? At this point my son Greg came in and congratulated me. He said, “Gee Dad, you should be pretty happy. With that win you can increase your lifetime consumption by 20 a year!” Greg, it seems, had studied the life-cycle theory of savings. The theory is simple, elegant, and rational—qualities valued by economists. Unfortunately, as Courant, Gramlich, and Laitner observe “for all its elegance and rationality, the life-cycle model has not tested out very well.” In this column, however, I focus on an assumption of the life-cycle model that has not received very much attention, but which, if modified, can allow the theory to explain many of the savings anomalies that have been observed. The key assumption is fungibility. This column will review a small portion of the empirical savings literature, with the objective of showing how violations of fungibility, and more generally the role of self-control, strongly influences saving behavior.