Concerned you’re overspending? A team of professors at the University of Chicago and the University of Maryland are too, and they set out to discover if peer pressure can help.
Professor Michael Weber at the University of Chicago Booth School of Business and Professors Alberto Rossi and Francesco D’Acunto at the Smith School of Business of the University of Maryland today revealed the results of an independent study on the effects of peer pressure on spending, with very positive, significant findings. This news is significant because when people using the website Status Money found out they were spending more than their peers, they reduced their spending by an average of $600/month. Currently, more than half of Americans have less than $1,000 in savings and 17 per cent have negative net worth. Peer pressure could combat what some experts are calling a debt epidemic.
The team of professors approached Status Money and analyzed the spending habits of more than 6,000 users of Status Money’s personal finance platform from September 2017 to April 2018. They wanted to determine how behavior changed when users realized they were spending more or less than their peers. Status Money helps people make smarter financial decisions by tracking all their accounts and comparing their finances with anonymous peers. Its free service, Status, helps everyone benchmark and manage their spending and saving versus peers — in categories ranging from shopping and gas to groceries and restaurants. Its algorithms also continuously analyze users’ accounts and provide personalized recommendations in natural language to help users save money.
The results of the study were startling. When people realized their spending was above that of their peers (those who have a similar age, income, location, and credit score), they reduced their spending by a whopping $600/month. The study found that Status users whose spending was furthest from their peer groups changed their consumption significantly more than those whose spending patterns closely mirrored their peers.
The team concluded that the observed behavior changes were directly caused by the Status peer comparisons. To determine causality, they examined near-identical groups of users who were matched to different Status peer groups only because their income was slightly above or below one of the thresholds that defines the peer groups. While the near-identical groups of users had similar spending behaviors before seeing their Status comparisons, their behavior diverged subsequently; users grouped with the lower spending peer group reduced their spending as a percent of monthly income by a massive 25 per cent (2.5X more than the users grouped with the higher spending peer group).
Those who need it most, benefit the most
The lowest income groups on Status changed their behaviors the most, confirming that access to data about peer spending and opportunities for saving have the biggest effect on those who may be least sophisticated about money matters. Those in the lowest income group (earning $40,000/year on average) reduced their spending as a percent of monthly income by 19 per cent, while those in the highest income group reduced their spending by 10 per cent.
The average Status Money user reduced their spending as a percent of monthly income by a seasonally adjusted seven per cent after joining. Users who learned they were spending more than their peer group drastically reduced their spending by an average of 23 per cent.
- The change in spending behavior was caused by the perceived difference between the user and their Status peer group – so users who were spending a lot more than their peers reduced their spending most aggressively.
- Regardless of their income level, users who found out they were spending more than their peers reduced their spending. That said, lower income users were able to reduce their spending more aggressively.
- Users who were spending more than their peers reduced their spending in discretionary categories (such as restaurants, entertainment, shopping, and travel) by a seasonally adjusted average of 19 per cent, and in non-discretionary categories (such as housing and loans) by one per cent.
- Those who were underspending their peers modestly increased their spending by a seasonally adjusted average of one per cent.