Being poor may also have positive effects on economic decisions
‘One established view is that continuing economic hardship may extensively shift our attention to, e.g., payments due, so that we do not concentrate enough on the other decisions we should make,’ says Niilo Luotonen. He will defend his doctoral dissertation at the Aalto University School of Business on Friday, 4 November. Luotonen studied the impact of poverty on decisions made by 350 vendors of the Iso Numero street paper, monitoring them for 14 months.
Luotonen shows in his study that the number of magazines vendors buy follows the demand they expect, particularly after a pricing shock that makes resources scarcer throughout the sample. Additionally, vendors speed up the average turnover of their inventories due to the shock. Diminishing resources therefore seem to result in more careful economic decisions, not worse ones.
Expecting an inadequate pension may cause different reactions in different social classes
In his doctoral dissertation, Niilo Luotonen also looked at confidence in the pension system and its effect on decisions made about saving and investing.
According to Luotonen, expected pension benefits may cause people to save less because they diminish the perceived need to save. With risky assets, such as shares, the logic may be the opposite: the insurance provided by the expected pension may enhance the willingness to take risk with private savings.
Luotonen used survey data on 5,500 individuals, provided by TNS Gallup, to examine how confidence in the sufficiency of pensions is visible in decisions to save and invest.
‘Doubts about the sufficiency of pensions increase the probability of investing in shares only among wealthy, financially literate men. Those who are likely to have a poorer understanding of financial matters regard risky investments and pension security as complementary, and only invest when they trust the system. These types of behavioural differences, related to societal status, should be considered in pension system design,’ says Luotonen.
Shareholders are happy with their lives
The dissertation also studies differences in subjective well-being between shareholders and non-shareholders. This is a novel approach to the economics of happiness literature, which studies the relationship between financial affluence and life satisfaction.
According to Luotonen, shareholders are happier than people who share the same level of wealth and demographic features, but do not own shares. Additionally, over the years, people who buy shares grow more satisfied than people who do not own shares.
‘Two alternative, not mutually exclusive, explanations for the results are discussed. First, shareholders may derive pleasure from discussing their investments and their development with other shareholders. Second, long-term investments in shares typically involve planning for the future, which may enhance general satisfaction with life through an increased feeling of control’, says Luotonen. The data used in the research comprises 19 European countries and more than 100,000 households.