Behavioral Perspective on Saving Behavior. Empirical Evidence for Policymakers

Abstract

Evidence is mounting that individuals do not always behave as strictly ‘rational’ customers of the banking sector as neoclassi- cal models of economics would assume. Instead, scholars and policymakers are increasingly arguing that behavioral economics offers a more useful and realistic means of understanding customer behavior in the real economy. Drawing on data from the first European Central Bank harmonized household survey at the European level and Eurostat, this paper develops a multi- level model to investigate how individuals actually save. We find evidence that loss aversion bias exists in saving behavior as regards an individual’s current level of income, and that evidence of this effect is also supported at the country level. We also find strong evidence that socio-demographic factors and cross-country differences influence individuals’ saving behavior. We argue that behavioral approaches can – and should – be used to understand saving behavior of individuals, and that this insight should be used towards the ongoing quest to improve future banking practice and financial reform, particularly in the aftermath of the 2008 financial crisis.