Automatic Savers

People are fascinated by wealth. They enjoy watching the wealthy, savoring the thought of their fine homes, luxurious vacations, fancy cars, and gourmet dining. But if you infer from this that people spend a lot of time planning the lifetime accumulation of their own wealth, you would be wrong.

Most people do not seem to think very hard about how much to save from their income, or about how big the differences in their wealth could be in their later years if they just adjusted their saving rate today. Most people just pay off their mortgage, make the mandatory contributions to their state or private pension (if they have one), and keep some money for short-run contingencies. That’s about it.

The economist Frank Ramsey, in a famous article published in 1928, said that people have a “weakness of the imagination” about how their actions today affect their own future. He said that if people thought about it correctly, they might well conclude that they should save half their income. That way, the accumulated wealth might make them very happy in their later years. But, mostly, they don’t even think about that possibility.

Richard Thaler, a contemporary economist, spoke in 1980 of an “endowment effect.” Even though people may admire other things, they act as if they are mostly happy enough with whatever they already have, and lack the will to consider real change.