JANUARY 26
Consumption Versus Saving
When Tomorrow Shapes Today’s Choices
The Signal
Whether people choose to save or consume depends greatly on what tomorrow does to what they save.
The Reading
Imagine two neighbouring valleys that produce identical apple harvests every autumn.
In the first valley, apples remain fresh for years. Families happily store part of each harvest, knowing those apples will still be valuable next season. Some will be eaten, some traded and others planted to grow even larger orchards. Saving becomes the obvious choice because time does not destroy what they have set aside.
In the second valley, the apples begin to shrivel almost as soon as they are picked. Every month they lose a little more of their sweetness and usefulness. Families soon realise there is little reward for storing them. Instead, they eat them quickly, trade them immediately or use them before they lose even more of their value.
The people in both valleys are equally hardworking, equally wise and equally disciplined. The difference is not the people. The difference is what happens to what they save.
When saving preserves its usefulness, people naturally look further into the future. When saving steadily loses its usefulness, consuming today becomes the more attractive choice.
The future people expect shapes the decisions they make today.
First Principles
People respond to the incentives created by the future.
Saving becomes more attractive when what is saved preserves its usefulness.
The way value changes over time influences the choices people make today.
Today’s Challenge
Imagine you live in one of these valleys.
If your stored apples would still be just as valuable next year, how much of this year’s harvest would you save?
Now imagine they would lose a little of their usefulness every month.
Would your decision change?
If so, what does that reveal about the relationship between saving, consumption and the future?
Tomorrow’s Signal
The Power of Delayed Gratification