A psychological approach to individual dierences in
intertemporal consumption patterns
qHermann Brandstattera,*, Werner Guth b
a
Johannes-Kepler-University, Linz, Austria b
Humboldt-University, Berlin, Germany
Received 13 May 1997; received in revised form 1 August 2000; accepted 13 August 2000
Abstract
When people decide about saving and consumption across the various periods of their lifetimes, they take into account their life expectancies when comparing present future needs and resources for satisfying them. The experimental design, applied to two sites (Humboldt-University, Berlin and Johannes-Kepler-(Humboldt-University, Linz), aims at simulating a sequence of atleast three, at most six saving vs consumption decisions, depending on a stochastic ma-nipualtion of changes in life expectancy. In this report, we focus on how personality char-acteristics in¯uence the amount of consumption in single periods of life depending on life expectancy changes which may render previous consumption rates too low or too high. Ac-cording to J.A. Gray (The Psychology of Fear and Stress, second ed., Cambridge University Press, Cambridge, 1987), it was predicted and found that unstable introverts respond most, and stable extroverts least, to this kind of `punishment'. In addition, some exploratory ®ndings involving the personality dimensions of self-control and tough-mindedness are report-ed. Ó 2000 Elsevier Science B.V. All rights reserved.
PsycINFO classi®cation:3120; 2223; 3920
www.elsevier.com/locate/joep
q
A preliminary version of the paper was presented at the IAREP workshop on Individual Dierences in Economic Behaviour and Games. International Center for Economic Research (ICER), Torino, 13±14 March 1998.
*Corresponding author. Tel.: +43-732-2468-225; fax: +43-732-2468-9315. E-mail address:h.brandstaetter@jk.uni-linz.ac.at (H. BrandstaÈtter).
JEL classi®cation:H3
Keywords: Experimental economics; Personality; Intertemporal consumption and saving; Individual dierences
1. Introduction
Saving behavior is crucial for economic development and, therefore, an obvious topic for experimental studies (see, for a survey, Anderhub & Guth, 1999). Macroeconomically, saving reduces consumption and thereby em-ployment, but it may also inspire investment demand via an increased capital supply which, in the short and long run, osets its direct detrimental eect on present employment. In microeconomics, deterministic and stochastic life cycle models (see Hall, 1978, for a survey) have been constructed which as-sume that people rely on intertemporal utility functions in choosing their consumption patterns over lifetime. Psychologically, saving, or, more gen-erally, intertemporal decision tasks, can be viewed as intrapersonal decision con¯icts (see, for instance, Frank, 1996). A saving pattern is an attempt to balance present and future needs, i.e., a way to resolve the con¯ict between one's present and future ego.
As it is often dicult, if not impossible, to test such models by ®eld data, what seems to be possible at most is to validate or reject certain requirements for intertemporal utilities, like their consistency over time. This quite natu-rally leads to attempts to analyze saving behavior experimentally. Here we do not want to look at all the evidence, but focus on a particular study which also asked the participants to answer the 16PA personality questionnaire (Brandstatter, 1988) allowing us to test some hypotheses about saving be-havior derived from personality theory.
2. Method
2.1. The saving game
units (`ECU'), which one can spend in the course of the saving game. Par-ticipants know that a `life' lasts for at least three and for at most six periods. How long it actually lasts depends on chance moves. Before the game starts, the participants are informed that the probability of reaching the periods 4, 5, and 6 depended on chance in the following way: there are three dice, a red, a yellow, and a green one. The meaning of the colors will be explained later. After having decided about the amountC1 of money to be spent in the ®rst
period, one of the three dice is eliminated, with a probability of 1/3. After the second move (deciding about consumption C2 in period 2), one of the
re-maining two dice is eliminated with a probability of 1/2. Therefore, a red, a yellow, or a green die is left for determining survival beyond periods 3, 4 and 5. If the green die is left, the good one, life ends after period 3 only when the number 1 (out of 6) comes up (survival probability of 5/6). The yellow die ends life with the numbers 1 or 2 (survival probability of 4/6). The ugly red die brings life to an end with the numbers 1, 2 or 3 (survival probability of 3/ 6). The remaining die is applied for moving (or not moving) from period 3 to period 4, from period 4 to period 5, and from period 5 to period 6.
Assuming that the participants understand the instructions, they know right from the beginning that the probabilities of survival after period 3 change from an initial probability of 2/3 5=64=63=6=38=12, de-pending on a random selection of die. If the green die is eliminated ®rst, the survival probability decreases to 7/12 4=63=6=2. If the red die is elim-inated ®rst, the survival probability increases to 9/12 5=64=6=2. The initial elimination of the yellow die does not change the survival probability
5=63=6=28=12. The survival probabilities change again when one of the remaining two dice is eliminated. Depending on the die ®nally left, the survival probabilities are 6/12 (red), 8/12 (yellow), and 10/12 (green).
Although the (updated) termination probabilities (the instruction did not speak of probabilities, but only of termination numbers of the dice) are easily derived, it is practically impossible to compute the saving pattern maximizing the intertemporal utility function.
2.2. Permutations of the elimination sequence (green±yellow±red)
2.3. Intertemporal utility function
The participant `earns' ECU-units equivalent to theproductof the periodic consumption levelsCt in the experienced periods t (up to six periods).
UP C1C2 CT:
Here,T is the stochastically determined length of life withT 3, 4, 5, or 6. In case ofT <6, all the money kept for the time after periodT is lost. On the other hand, leaving too little or even nothing for the last periodTresults in a low payoff UP, or even UP0.
The intertemporal utility function is psychologically meaningful insofar as it prompts the players to ®nd a good compromise between equality of con-sumption across all six periods (which would maximize utility and, of course, avoid `dying from starvation', if `life' actually lasted six periods) and spending all the money over the lifetime.
Since a participant experiences 12 successive `lives', one has to specify how the 12 payosUPin runs 1±12 of the saving game determine his/her monetary win. Instead of imposing a monetary win (either the average of 12 payosUP or a randomly selected value UP), participants were asked to choose for themselves which payment they preferred.
2.4. Participants
The experiments were run (mostly with students of economics or business administration) at two sites, at the Humboldt University (Berlin) with 50 participants, and at the Johannes-Kepler-University (Linz), with 117 sub-jects. There were minor dierences between the Berlin and Linz procedures which can be neglected in the present context.
2.5. Personality scales
allow internal consistency checks. We propagate its general use since it provides some control of what kind of people participate in the study and since it allows, as demonstrated here, to account in a systematic way for individual dierences in behavior. Four of the ®ve global dimensions are used in the present experiment: self-control, emotional stability, extroversion, and tough-mindedness. For each global dimension, two examples of adjectives are given:
2.6. Participants' perceptions of the experimental situation
The eects of personality characteristics on game behavior are supposed to be mediated by the way people perceive the experimental situation. There-fore, after ®nishing the game, the participants were asked to indicate on adjective rating scales (Brandstatter, 1990) how they had experienced the game situation. The 28 bipolar adjectives represent two global dimensions of situation perception.
Self-control
Careless 1 2 3 4 5 6 7 8 9 Conscientious
Uncontrolled 1 2 3 4 5 6 7 8 9 Self-disciplined
Emotional stability
Easily upset 1 2 3 4 5 6 7 8 9 Emotionally
stable
Self-doubting 1 2 3 4 5 6 7 8 9 Self-assured
Extroversion
Impersonal 1 2 3 4 5 6 7 8 9 Outgoing
Restrained 1 2 3 4 5 6 7 8 9 Lively
Tough-mindedness
Sensitive 1 2 3 4 5 6 7 8 9 Thick-skinned
Imaginative 1 2 3 4 5 6 7 8 9 Down-to-earth
Pleasant activation
Boring 1 2 3 4 5 6 7 8 9 Interesting
Unpleasant 1 2 3 4 5 6 7 8 9 Pleasant
Mastery
Dicult 1 2 3 4 5 6 7 8 9 Easy
The reliabilities (Cronbach alpha) of the global personality and situation perception scales are around 0.80.1
3. Hypotheses
How can we explain the widely varying intertemporal consumption pat-terns by taking into account the interplay between the structure of the situ-ation as given by the experimental design and the structure of the personality assessed by the 16PA?
If someone has spent much in the ®rst and second period and realizes that ®nally the green die will be applied for determining survival beyond period 3, s/he is supposed to feel punished by his/her fate, just like someone who has spent little in the early periods and realizes later that the red die will determine his/her survival. The reaction towards this kind of `punish-ment' should be a change in spending (spending more or spending less) in period 3.
Now, we have to ask whether personality theory suggests dierential reactions to such punishment. Gray (1987) postulates, referring to research on neuro-physiological processes involved in responses to reward and punishment, that introverts will be more responsive to punishment than extroverts, more so when emotional stability is low. According to Gray (1987, p. 350 f.), no dierence is expected between stable introverts and unstable extroverts in sensitivity to punishment. In our context, being more responsive to punishment means showing more pronounced changes in behavior, i.e., in spending more in period 3 if the red die is applicable, and spending less, if the green die determines the life expectancy. Gray's model implies a kind of interaction between emotional stability (the opposite of neuroticism) and extroversion which leaves the order of the eects, but not their magnitudes, unchanged. Fig. 1 has been inspired by Fig. 14.6 in Gray (1987, p. 351). It shows that emotionally unstable introverts are most, and emotionally stable extroverts least responsive to punishment, and that the dierence within the two groups of introverts is larger than that between the two groups of extroverts.
The two basic dimensions ± emotional stability and extroversion ± can be derived as global (second-order) factors from Cattell's 16 personality di-mensions (according to which the short adjective version 16PA has been designed by Brandstatter, 1988).
A second hypothesis refers to the subjects' choice of the modus of pay-ment, the average payo across all 12 rounds or the payo of a single, ran-domly selected round. It is assumed that people high on the global personality dimension `self-control' (they describe themselves as conscien-tious and self-controlled) prefer the average to the random choice of an outcome as payo, because they shun higher risks. Participants low in self-control are supposed to opt for the random mode of payment because of their risk-proneness, possibly also because they can attribute an eventual failure to bad luck, thus relying on an ego-defensive attitude, which appears to be rather typical for low self-control people.
4. Results of hypotheses testing
There are two sections of results. The ®rst focuses on hypotheses testing; the second reports some additional results of exploratory analyses.
4.1. Payo modus
Let us start with the rather simple second hypothesis: people high on self-control prefer the average of all 12 runs, people low in self-self-control choose the random selection of one run. This is indeed true. Averaged across the two experiments (Berlin and Linz), which show the same pattern of results, only 56% of the participants low in self-control (below median) chose the less risky averaging payoff format, whereas 80% of the people high in self-control decided for this format (v220.07,p0:000). The effect size (mean differ-ence divided by the within-group standard deviation) is quite substantial (d 0:53).
4.2. Reaction towards `punishment'
We expected withhypothesis 1that anxious subjects (emotionally unstable introverts) are more, and stable extroverts less sensitive to punishment. De-note by Cit the average consumption in period t for permutation i (see Table 1). The hypothesis claims a contrast, i.e., a difference of differences in average consumption, namely,
x C51C52C61C62=4ÿ C53C63=2
ÿ C11C12C21C22=4ÿ C13C23=2:
x[(average consumption in the ®rst two periods of permutations 5 and 6) minus (average consumption in the third period of permutations 5 and 6)] minus [(average consumption in the ®rst two periods of permutations 1 and 2) minus (average consumption in the third period of permutations 1 and 2)]. This dierence of dierences indicates the strength of the participant's sensitivity to `punishment' as it is realized with the dierent elimination
Table 1
Permutations of the sequence of dice elimination Permutations
1 2 3 4 5 6
Eliminated after ®rst period Green Yellow Green Red Yellow Red
Eliminated after second period Yellow Green Red Green Red Yellow
sequences of the green, yellow or red die. Instead of this kind of dierence scores,2we use dierences of standardized residuals as dependent variables in testing the eects of personality (emotional stability and extroversion) on sensitivity to punishment. This implies predicting C53C63=2 from C51C52C61C62=4, and predicting C13C23=2 from C11C12
C21C22=4, computing the standardized residuals (zresid) and calculating
dierencexzresidC13C23=2minus zresid C53C63=2.The higher the
difference score, the stronger the effect of punishment. A difference score of zero comes up if a participant chooses under permutations 1 and 2 (the survival probability is that of the red die) as well as under permutation 5 and 6 (the survival probability is that of the green die) just that consumption in period 3 which would be predicted from the consumption rates of the preceding periods 1 and 2. Negative difference scores point to inconsistent reactions: not prop-erly adjusting expenditures to the situation given with the red or green die.3
It is claimed thatx, represented on the vertical axis of Fig. 1, is larger for introverts than for extroverts, and larger for emotionally unstable than stable participants. Fig. 2 presents the results, separately for the ®rst and second cycle, then combined for both cycles of both the Berlin and the Linz studies, because both studies came up with the same pattern of effects. It shows that stable extroverts are indeed least sensitive to punishment in both cycles. A 2 (low vs high stability) by 2 (low vs high extroversion) by 2 (®rst vs second cycle) ANOVA, with cycle as within subject factor, results in a marginally signi®cant main effect of emotional stability, F 1; 163 2:80; p0:096;
g2 0:017, and a signi®cant main effect of extroversion, F 1; 163 5:28; p0:023; g2 0:031. There is no signi®cant interaction between emotional stability and extroversion (p>0:30), although emotional stability makes a larger difference in extroverts than in introverts. The effects are stronger in the second cycle than in the ®rst cycle,F 1; 163 9:52; p0:002. There is no signi®cant interaction of stability or extroversion with cycle (p>0:30).
5. Results of exploratory analyses
The results reported in this section do not refer to theoretical predictions but have been selected out of various exploratory analyses if they met the
2Contrary to dierences of residuals, simple dierences do not separate `real' dierences from regression artefacts (cf. Petermann, 1978).
following three criteria: (a) they are signi®cant (p<0:01, however without alpha-adjustment for post hoc comparisons), (b) they make sense in post hoc interpretations, and (c) they are consistent across the two studies (Berlin and Linz) as well as within the studies across the two cycles. We think that they deserve some attention even if their statistical signi®cance is questionable due to the post hoc comparison strategy.
5.1. Tough-mindedness
Exploring additional relationships between personality characteristics and adjustments to changes in life expectancy (operationalized as sensitivity to punishment), we found a consistent eect of the dimension tough-minded-ness. Remember, tough-minded people (N 88) describe themselves as tough-minded (Iÿ), realistic and rational (Mÿ). They respond more strongly to unexpected changes in `survival' probabilities than tender-minded people
N 79 in both cycles (M 0:05 vs M ÿ0.37, SD1.01 vs SD1.47 in the ®rst cycle:M 0:35 vsM ÿ0:08, SD0.98 vs SD1.33 in the second cycle), and the same pattern of results appears in both experiments. Taking an average across both cycles gives a dierence with F 1; 165 6:99; p0:009.
5.2. Dependence of payo on dierence score
Fig. 3 presents payo as a function of the dierence score for both cycles combined. Collapsing the two cycles is justi®ed by the fact that the shape of the curve is basically the same in both cycles. Payo is highest around a dierence score of x0:8. Of course, not properly adjusting one's con-sumption to changes in survival probabilities diminishes the payo.
Fig. 3. Payo as function of sensitivity to punishment. Estimated payo26:390:83xÿ0:54x2;
Extroverts, in particular stable extroverts, lack this adjustment because ± this was our theoretical prediction ± they are less responsive to punishment (Fig. 2). This explains why stable extroverts get a payo about one-third of a standard deviation less than average in the ®rst cycle (cf. Table 2).
5.3. Learning from the experience of the ®rst cycle
People generally show a stronger response to unexpected changes in
sur-vival probabilities in the second cycle than in the ®rst cycle,
F 1; 163 9:52; p0:002; g2 0:055 4 (Fig. 2). This change is
particu-larly visibe in unstable introverts and stable extroverts, although the higher-order interaction (cycle by emotional stability by extroversion) is not sig-ni®cant (p>0:10). As a consequence of those adjustments, extroverts, in particuar stable extroverts, improve their payos from the ®rst to the second cycle, whereas introverts do not, possibly because they overreact to punish-ment in the second cycle. The interaction cycle by stability is signi®cant, F 1; 163 5:85; p0:017; g2 0:035. The variance attributed to this interaction derives mainly from the payoff increase of the stable extroverts.
6. Discussion
In both cycles (remember, a cycle is a run of six permutations), emotionally unstable introverts are most sensitive to punishment, whereas emotionally stable extroverts are least sensitive (Fig. 2). This is in line with our predictions
Table 2
Payo dependent on personality structure and cycle
Stability Extroversion Cycle N M SD
Low Introvert 1 36 26.49 7.47
2 36 25.03 6.46
Extrovert 1 49 26.59 8.80
2 49 25.31 7.36
High Introvert 1 41 26.46 7.78
2 41 26.82 7.76
Extrovert 1 41 23.29 6.95
2 41 26.22 8.34
4
derived from the theory of Gray (1987, p. 350 f.), which also states that there is no dierence between stable introverts and unstable extroverts in sensitivity to punishment, and that both groups are between (the most sensitive) un-stable introverts and (the least sensitive) un-stable extroverts. According to Gray's model, the polarity introversion±extroversion determines whether a person is more sensitive to punishment or more sensitive to reward, and neuroticism is conceived as a kind of multiplicative factor augmenting the sensitivity to punishment or reward, respectively. This implies a kind of in-teraction between neuroticism and extroversion which should result in larger dierences of punishment eects between unstable and stable introverts than between unstable and stable extroverts. In our data, however, emotional stability increases the dierence in extroverts. Although interaction stability by extroversion is not signi®cant, this pattern of results is not in line with the model of Gray.
We may ask why, in the saving game, the dierence in sensitivity to punishment between unstable and stable introverts is not larger than that between unstable and stable extroverts. An answer may be found in the participants' ratings of how they had perceived the experimental situation. From the 28 adjective rating scales, two dimensions were derived labeled as pleasant activation (with marker variables interesting, pleasant) and mastery (easy, clear). Only stable extroverts have high scores on pleasant activation (the eect size of the contrast between stable extroverts and the other three groups is d 0:32), 5 and, on average, stable extroverts are also least sen-sitive to punishment. Perceiving the game as a stimulating and pleasant ex-perience seems to make participants less sensitive to punishment.
Still, we do not know why the unstable introverts experienced the situation no more negatively than the stable introverts and the unstable extroverts. The answer could be found in the second dimension which we called `mastery': introverts, whether unstable or stable, have higher scores on mastery than extroverts, i.e., they ®nd the game easier and better to comprehend. Here one may refer to the ®nding that introverts tend to have better school marks and higher performance scores in cognitive tests (Brandstatter, 1997). If they indeed have a better understanding of the game and of how more money can be earned, they will rationally restrain themselves from too strong re-actions to `punishment' which would diminish their payo, thus keeping the
dierence between unstable and stable introverts in their responses to pun-ishment in the present experiment at a moderate level. Fig. 3 shows that, on an average across cycles, payos reach their maximum around a dierence score of 0.80.
Participants react less to changes of life expectancy, i.e., to `punishment' in the ®rst cycle. Obviously, the participants have learned to respond more adequately to stochastic changes in life expectancy. We may also assume that the decisions in the ®rst cycle are somewhat more erratic than those in the second cycle. If so, the data of the second cycle are better suited to test Gray's model, and the results of the second cycle are also in better agreement with the theoretical model.
Sensitivity to reward, in Gray's model lowest in stable introverts and highest in unstable extroverts, is not an issue in our experiment, because reward, i.e., starting with high consumption and ®nding out that the red die will ®nally be applied (permutations 1 and 2), or starting with low con-sumption and ®nding out that the green die will determine the life expectancy (permutations 5 and 6), does not imply any impetus for change. Without a pressure for change, however, we cannot expect any dierential eects of personality structure.
That tough-minded (realistic and rational) people adjust their decisions more clearly to changes in survival probabilities makes sense. Their behavior comes close to what economic rationality would prescribe.
7. Conclusion
Four of the ®ve global personality dimensions (second-order factors of Cattell's system of personality measures), i.e., self-control, emotional stabil-ity, tough-mindedness, and extroversion, proved useful in explaining inter-temporal saving and consumption decisions. Although eect sizes as indicated by the percentages of variance explained by the independent vari-ables (g2) are modest, the consistency of the results across replications (Berlin
Acknowledgements
The authors thank Vital Anderhub, Wieland Muller, and Martin Strobel (Humboldt University) and Willy Kriz (Johannes-Kepler-University) for their contributions in planning, running and analyzing the experiment. See Anderhub et al. (in press) for a detailed report on the experiment which did not refer to the individual dierences.
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