The influence of future income expectations on consumer judgments and behaviour

Schanbacher, Anja (2018) The influence of future income expectations on consumer judgments and behaviour. Doctoral thesis, University of London: London Business School.

Abstract

Consumers have increasingly fragmented work biographies. Rather than working in the same position for most of their adult lives, many individuals experience frequent changes between jobs and careers, or they interrupt their careers in order to earn advanced degrees. This trend has important financial implications. One implication is that many consumers can expect their income level to fluctuate over time. Another implication is that consumers face increasingly diverse financial circumstances when they retire, which has brought pension systems into the focus of public policy debates. An important point in this discussion is whether consumers should receive their pension savings in the form of a lump sum or as an annuity (monthly income), two options which imply very different paths of income over the later years of their lives. As these examples illustrate, consumers' financial circumstances are not static but develop in different ways over time, and it is of theoretical and practical interest to understand how expectations of future income affect present consumer judgments and behaviour. I address this topic in the three chapters of my dissertation. In Chapter One I investigate how anticipated income decreases or increases influence present discretionary spending. This question has received much attention in economic literature, but psychological factors are thus far largely unexplored. I identify self-continuity - a sense of identification with the future self - as a psychological factor that can help explain beyond economic factors how consumers adjust present discretionary spending to future income changes. In Chapters Two and Three I investigate how the specific form in which pension savings are paid out - as a lump sum or as an annuity (monthly income) - influences consumer behaviour. In Chapter Two I find that an intervention that increases the subjective likelihood of receiving an annuity rather than a lump sum may encourage health related behaviours. In Chapter Three I propose that, contrary to widely held beliefs, lump sum versus annuity pension payout may reduce discretionary spending, and may induce a shift in preference towards material over experiential purchases. Together, the three chapters of my dissertation demonstrate the importance of considering individuals' expectations regarding, and ways of thinking about, future income in understanding and explaining consumer behaviour. The behaviours I study are consequential for consumer well-being and life satisfaction. The interventions I have developed for my studies form a basis for public policy and marketing applications.