Some stuff » base case https://blog.yhuang.org here. Wed, 27 Aug 2025 08:50:58 +0000 en hourly 1 http://wordpress.org/?v=3.1.1 saving vs. consumption as default actions https://blog.yhuang.org/?p=171 https://blog.yhuang.org/?p=171#comments Tue, 17 Mar 2009 20:23:08 +0000 admin http://scripts.mit.edu/~zong/wpress/?p=171 Lately, for good reason, there has been many advice columns telling people how to plan for personal financial goals. It always used to boggle my mind when I heard exhortations to save, where “save” is used in the sense of an action among which to choose, parallel to things like “invest” or “work”. Until I realized, some years back, that to save is a parallel action of choice to some.

I guess I’ve never had that notion. To me, saving isn’t something to do, it’s what happens by itself, by default, if you do nothing. How can you “invest” or do anything else without already having saved? It’s more like the base case underlying most other actions that occur at a hierarchically higher level. This notion is tightly coupled with the other notion that to borrow is only a time shift where you temporarily go into negative territory for a short time out of necessity (like in an emergency). This is typically risk averse behavior.

Now let’s turn to the other model of behavior, where things are swapped around. Here, consumption is the default. To consume is what happens if you do nothing; that is the raison d’etre. All other actions service that need. In other words, why bother to “save” or “invest” or “work” if you do not consume? See how this is inverted? Again, this is tightly coupled with the notion that borrowing is a tool of persistent leverage for greater return. This is typically risk taking behavior, in technical parlance of course.

To make the cases even more distinct, here are two graphs of model behaviors:

“savers”
Input: digraph G { rankdir=BT node [shape = rect]; {save [style = filled, color=lightgrey] } {rank=same; invest consume work} work->save save->invest->save save->consume }

“consumers”
Input: digraph G { rankdir=TB node [shape = rect]; {consume [style = filled, color=lightgrey] invest save work} invest->consume save->consume work->consume }

So people try to analyze why East Asia saves so much and why China especially cannot get internal demand going due to excess savings, whether it’s because of the lack of a social safety net, or because of an inequitable distribution of wealth. Yes, these have some effects, but no. I don’t think those are why. It has to do with how personal financial behavior is internalized from the past, as much as influenced by conditions in the present. I think risk averse behavior is ingrained into people in times of scarcity (credit scarcity or capital scarcity) and how long this behavior lasts depends on the severity of a downturn and the subsequent period of prosperity. (As an aside, it can be argued that risk taking behavior isn’t entirely risk taking behavior but partly a bad estimation of the actual risk.)

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