Understanding why people underpredict expenses could help them budget more accurately — and even encourage them to save more money.
The big ideaWhen asked to estimate how much money they would spend in the future, people underpredicted the total amount by more than $400 per month. However, when prompted to think about unexpected spending in addition to typical expenses, people made much more accurate predictions.
In the study’s fifth and final week, we ran an experiment to see if we could improve people’s prediction accuracy. Next, we conducted nine experiments to better understand why people underpredict their spending and whether being prompted to think of unusual expenses helps improve accuracy. In all, over 5,800 people participated in these experiments, including a representative sample of U.S. residents.First, people primarily base their spending predictions on typical expenses like groceries, gasoline and rent.
Payday loans also come due in full so quickly that around three in four borrowers end up borrowing again to pay off the original loan.
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