Why do people spend or save during recessions?

MIT Sloan research: Responses to scarcity depend on childhood environments

CAMBRIDGE, Mass., April 3, 2013 – Does the economic environment in which you are raised affect your response to financial scarcity as an adult? According to research by a team of researchers including MIT Sloan School of Management Prof. Joshua Ackerman, the amount of financial resources you grow up with shapes how you respond to economic stress later in life. Those who grow up with plentiful resources tend to become more risk averse and slow down spending when faced with economic crises as adults. In contrast, people who grow up in poorer environments tend to spend money faster during those times.

While it may not make long-term sense to spend money when the economy falters, Ackerman explains that the idea is consistent with life-history theory, which “in essence states that your early life environment can sensitize your responses to problems throughout life, creating a pattern of behavior that emerges most strongly when you are faced with decisions during stressful times in adulthood. As a result, those who grow up in poorer environments — and may face relatively shorter lifespans – can respond to crises like recessions by prioritizing spending on things that promote quicker reproductive success rather than on things that support long-term health or stability.”

Childhood socio-economic influence emerge

Drawing on this theory, Ackerman and his co-researchers ran a series of experiments to determine how people’s responses to economic scarcity were impacted by the harshness of their early-life environments, as reflected by childhood socioeconomic status. In one study, they determined the subjects’ economic background and then asked questions like: “Would you prefer to have $20 tomorrow or $30 a month from now?” They also asked questions about risk, such as: “Would you prefer a certainty of receiving $20 or a 60% chance of getting $50?”

...your early life environment can sensitize your responses to problems throughout life, creating a pattern of behavior that emerges most strongly when you are faced with decisions during stressful times in adulthood

They found that people who grew up in lower socio-economic status environments were more impulsive, took more risks, and approached temptations more quickly after thinking about the ongoing recession. In contrast, people who grew up in higher socio-economic status environments were less impulsive, took fewer risks, and approached temptations more slowly. They also tested oxidative-stress levels – a urinary biomarker of cumulative life stress exposure – and found similar results.

In all of the experiments, Ackerman points out that the behavioral tendencies associated with early-life environments only emerged under conditions of current economic uncertainty. Otherwise, they were dormant.

“These findings fit with the idea of life-history theory in showing that the environment you grow up in shapes how you see the world and your future,” he says. “If you are from a poorer environment and hit with a recession, you might think your chances of weathering the storm aren’t great, so you put your resources into other outcomes that are more tied to reproductive pursuits and interpersonal displays intended to show off with things like jewelry and cars.”

Ackerman adds, “That might seem foolish from an economic perspective, but this behavior can be deeply rational from an evolutionary perspective. It also underscores the notion that not everyone will respond in a universal fashion to recessions.”

The full paper, “When the Economy Falters, Do People Spend or Save? Responses to Resource Scarcity Depend on Childhood Environments,” was coauthored by Ackerman and published in the Feb. 8 issue of Psychological Science. http://web.mit.edu/joshack/www/Griskevicius_Life-history-spending.pdf

For more information about Prof. Ackerman, please visit: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=41256