The Life-Cycle Hypothesis

The Life-Cycle Hypothesis (LCH) explains the saving and dissaving behavior of consumers via the life-cycle stages of a household. The LCH posits that spending and saving will vary as individuals attempt to hold their marginal utility of consumption constant as they transition through the various stages of the life cycle. The three stages of the life-cycle consist of young, middle-aged, and retired members of a household. As households venture through various stages over the life-cycle, each stage presents distinctive financial goals and challenges for consumers. The LCH also states that the total resources available for consumption over a lifetime is the sum of an individual’s net worth at the beginning of the period, plus the value of income …show more content…
Mental accounting is a behavioral construct considered in economic psychology as an essential variable in explaining the saving and consumption behavior of consumers. Consumers employ mental accounting techniques to track their financial activities using account labels and rules. The presence of account labels influences the decision to spend. In the BLC model, the marginal propensity to consume is assumed to be account specific and based on a consumer’s financial wealth. Financial wealth is determined by the components of the consumer’s lifetime financial resources. The lifetime financial resources consist of wealth being divided into three mental accounts; disposable income, investable assets, and future income. Using the BLC as a theoretical framework, this study argued that the behavioral constructs of mental accounting impacted the spending and saving behavior of consumers based on their attitude and behavior towards the use of investable assets and spending …show more content…
Behavior focused on saving was identified by consumers who disagree that they would spend more if their assets appreciated in value and agree that they would spend less if their assets depreciated in value. The model predicts that consumers displaying this type of behavior would be expected to possess loan balances for goods and services that amount to 22% more than consumers who don’t employ mental accounting techniques focused on saving. When examining the descriptive statistics outlined in this study, the prediction of the model is not supported when comparing saving behavior to spending behavior, as consumers employing behavioral techniques that promote spending had higher debt balances in all categories of debt. When comparing the results of saving behavior to those of consumers not employing mental accounting techniques, consumers employing saving behavior had a higher mean balance of loans for goods and services, and a lower mean balance of home equity debt and pension loan debt. In both models, the mental accounting coefficient that illustrates the propensity to save was statistically