Intertemporal choice is one of the foundational models in economic theory. It sets the human lifetime in just two periods – today and tomorrow – to evaluate how people make choices over time. Generally, an individual can prefer to save money today and spend more tomorrow, or borrow today and spend less tomorrow. Quite often, there is a present bias in our personal choices – many people prefer instant gratification, which can be empirically proven by the excessive credit card debt in America or the low levels of retirement savings present globally.
However, what can we say about the “patient planners”? How do they view present expenses and how can someone fall into the trap of excessive saving behavior? These questions were foundational for the reality show “Extreme Cheapskates”, which follows the routines of excessive savers and the daily precautions they take to achieve minimum spending. The reality show displays extreme behaviour which is nowhere near the pattern of the average consumer, and yet it makes the viewer pose the question: are those measures actually worth it and how much exactly will I end up saving if I imitate these actions?
These are the questions we aim to answer. To achieve that, we will create a sample of individuals, analyze their personal actions individually, and finally sum up our results.
Single mom Kia Cambridge is our first subject of observation. The conducts that characterize her saving behavior are the following: use of hair over dental floss, buying a large latte to split over 3 days and freezing chewed gum to preserve the flavour. Let’s calculate the results. Oral B’s essential dental floss costs 2.38$ for 50m, and considering that the average person flosses by using on average 0.6m per day that accounts for 83 days. This means that yearly, Kia would need to buy 5 packs of dental floss (4.39 to be exact), which in turn will cost her 11.88$. Moving on to the latte, a grande from Starbucks’ official website costs 6.48$, so if she buys one everyday it will cost her 2 365.2$, while she pays only a third of that – 788.4$. For the gum, Kia says she chews one gum per day and allows herself a new piece of gum twice per week – on wednesdays and saturdays. With that strategy she claims to be able to spend no more than 10 dollars per year on gum. In the US, an average pack of gum costs 1.5$ per 15 sticks, but if you buy in bulk from specific candy stores you can acquire a cost of 0.05$ per stick or equivalently, 18.25$ a year, considering she has one gum everyday. Taking all into account, Kia manages to save 1596.93$ a year, the majority of which (1576.8$) comes from the coffee alone.
Classical utility theory supports Kia’s choices. According to the model, people are looking to maximize total utility considering the whole horizon – their whole lifespan – and thus goods with low marginal utility (like extra clothes, clubbing, going out, luxury items, etc.) are the preferable choice to save on, while spending is better utilized for goods characterized with high marginal utility (like health, wellness, education, etc.). This thesis is further supported by Daniel Kahneman. In his book Thinking, Fast and Slow, he presents the argument that humans operate according to two systems: system 1 – the impulsive, irrational and emotional side (that is usually responsible for the decisions we make fast on the daily); system 2 – slow, logical, enduring. Thus, if we manage to control our impulse buying acts that are usually motivated by emotional volatility, and refrain from spending on fast food, entertainment and unusable gadgets, and instead invest long term we would be exponentially more financially stable. This, Kahneman says, is usually because people hyperbolize the happiness that certain items will bring today, while simultaneously heavily discounting the future, which ends up harming them in the long run. These theories are of course present in many earlier works as well, like the Marxian view, that states that consumption has to satisfy needs and not aid to further capitalist profit.
To create a more diversified sample for our conclusions, we examine Jordan Page’s and Michael McSurley’s case as well. The American couple declares to have set a monthly budget of $1,400 for their family of 5, sure that some restricting measures could make up for the hundreds of dollars not spent. These include rationing food, accepting neighbours’ leftovers, and for Micheal also re-using his bath water to wash dishes, the kids, and clothes. In the episode Jordan repeatedly mentions spending less than half of what a typical household spends per month. At the end of the year, if we considered the numbers cited on the show, the family would save approximately $19,200! But while it is clear that these kinds of behaviors will lead the family in saving money, we cannot refrain ourselves from asking: is the final balance a positive one?
Some think it isn’t, but let’s see why.
Sourcing “free” food, rationing everything, wrapping one’s belongings in plastic wrap to prevent them from wearing and minimising water-consume by reusing urine are just some examples of how life can be lived differently, if we started budgeting everything. And all of these measures are definitely horrific for most people.
The dangers connected to being an extreme cheapskate are various, starting with the inevitable detriment of personal relationships and friendships. Many reportedly admitted having cut connections with people who would make a scene for a $2 dollars menu difference, or that would go to weddings with plastic containers to take home some of the food offered. This is not the worst scenario, though: the seriousness of their situations becomes instantly more evident if we consider cases like Angel’s, a pregnant woman that goes looking for discarded medication in the dumpsters behind pharmacies and drugstores.
The same goes for snack-hunting, if that concerns looking for popcorns in baskets thrown in the bins by previous movie-goers.
Some think most individuals and families featured in the show suffer from an OCD, an Obsessive Compulsive Disorder, and for this mental condition they should seek help.
Despite personal considerations, it is safe to say that this way of living is a full-time job, one that divides the public opinion. Many behavioural economists have argued that constant self-control over every little decision might turn out to impact negatively on our ability to make smart long-term financial decisions. The idea of ego depletion where we continuously deny ourselves all pleasurable small goods like snacks, desserts or tiny purchases, ends up “eating up” our energy and capability for emotional regulation. Thus, when we have to look at the bigger picture and plan ahead long term we experience decision fatigue and thus we avoid taking responsibility altogether or, alternatively, we take ignorant impulsive decisions that require less cognitive energy. This can in turn lead to even harmful behavioural patterns like loss of discipline entirely or indulgence patterns. For that reason, Nobel prize laureate Richard Thaler argues that saving decisions should be based on automation processes, so that high-impact choices are not disregarded.
Overall, we all have subjective views on consumer behavior, so before crafting a spending plan we need to ask ourselves: how much is too much?
References
https://fortune.com/2022/05/29/extreme-frugality-personal-finance-problem-bad-to-save-too-much/
https://www.news24.com/life/the-dangers-of-being-an-extreme-cheapskate-20140721
https://www.today.com/popculture/what-we-can-learn-cheapskates-wbna38034916
B.BIAS 