Behavioral economics teaches us that people use many layers of reasoning to inform their consumer decisions. In the face of a pandemic, those layers may deepen and reorient survival strategies. Italian economists Jappelli and Pistaferri explored how consumers adjust their wealth goals based on shocks to their current income stream. The US Federal Reserve Board’s triennial Survey of Consumer Finances confirms that most US households lack a “safety net” of resources sufficient to weather even a small financial storm. However, for those who can maintain a rainy-day wealth fund, according to Jappelli and Pistaferri, savings goals are adjusted about one-to-one to shocks to current income streams. For example, if income is cut by 30 percent, rainy-day fund targets are reset downward by 30 percent. Actual financial behavior, in contrast to goal setting, suggests that it takes about three and a half years to replenish emergency funds. Not surprisingly, it takes the wealthy less time than the less-wealthy to get back to square one.
Source: Jappelli and Pistaferri (2020), “Permanent Income Shocks, Target Wealth, and the Wealth Gap,” a working paper of the Stanford Institute for Economic Policy Research.