Matching Planned Consumption to Earnings: The Mental Accounting of Income Volatility

Shannon White, Behavioral Science PhD student

Research shows that individuals do not always treat money like a perfectly fungible resource. For example, invididuals can show different marginal propensities to consume out of different income sources. This project aims to build on this literature by showing that, in lab experiments carefully controlling for factors commonly correlated with income volatility in the real world, some individuals will vary planned consumption with earnings rather than smooth consumption, such that higher volatility leads to higher variance in planned spending. Preliminary results from two pilot studies support this hypothesis. Future work will aim to replicate and build on these early results. Additionally, this project seeks to test findings from the lab in a real-world setting, ideally identifying mismatches between planned and actual consumption, as well as how volatility influences any mismatches.