2014 Conference

Households show an asymmetric pattern of consumption in response to income changes: 1) They are more sensitive to expected income declines than income rises and 2) under the high uncertainty of expected income declines, they do not decrease their consumption level. Loss aversion based on the prospect theory can explain this asymmetric consumption change. The objectives of this study are: 1) to prove the relationship between expected income change and savings of households using a gain and loss utility function and 2) to investigate explanatory variables on the likelihood of saving during the recent economic crisis. The SCF 2007-2009 panel data will be used. Dependent variable is whether they saved or not as a dichotomous variable, while explanatory variables are expectations of income change, financial attitude variables such as risk tolerance variable and planning horizon; and the socio-economic variables such as age, education, income, net worth, and marital status. Logistic regression will be implemented. This study expects that under high uncertainty, those who expected their future income to decline in 2007 would have less likelihood of saving in 2009 than those who expected future income to be about the same, or increase holding other things constant.