Home budgeting a complex task

COMPUTER simulations of how people manage their money are providing sociologists at Surrey University with new insights into household expenditure.

Researcher Edmund Chattoe says the process of saving and spending is highly complex but people, especially pensioners, manage it very well. "What we are attempting to do is develop an economic theory which reflects that complexity and skill," he says.

The way people spend and save cannot be explained purely in terms of costs of goods or the number of items bought. A more accurate way to describe such behaviour is to distinguish between "predictable and unpredictable" expenditure in daily life, Mr Chattoe says.

The banking arrangements of households have a major influence on this behaviour. Mr Chattoe says that most householders have separate savings and current accounts. Typically, predictable expenditures are dealt with from current accounts while irregular spending is met by savings. He says: "People have two or more different accounts not just for pragmatic reasons but because it helps them to see the money in different ways and this has a profound influence on their behaviour."

People change their purchasing behaviour depending on whether balances in their savings or current accounts are increasing or decreasing. A surplus in the current account allows greater regular expenditure or can help finance bigger projects such as holidays.

A deficit in the savings account encourages attempts to "regularise" expenditure by, for instance, paying a large bill in instalments rather than all at once. Over the long term, the balance between regular expenditure and savings reflects the level of uncertainty being experienced by households about future events.

Mainstream economic theory suggests that people save according to a specific plan about future consumption.

But the researchers have found that people tend to save against the future in general. "You cannot, for instance, predict when the TV, washing machine or car is going to break down," Mr Chattoe says.

Similarly pensioners spend little on clothing and furniture because they regard them as durable goods which, if looked after, will last.

"Conventional economics tends to underplay such behaviour," Mr Chattoe says.

The research by Mr Chattoe and his colleague Nigel Gilbert involved detailed interviews with 25 households. Questions covered money management, forms of payment, attitudes to shopping and plans for the future. Data collected was then fed into a computer programme designed to mimic the way spending and saving behaviour develops.

According to Mr Chattoe: "Economics formalises into a mathematical framework decisions and behaviour which people often verbalise in everyday life. We are using computers to develop a middle ground, somewhere between the formality and elegance of mathematics, and the richness and ambiguity of everyday conversation which is so effective in describing reality."

The work is funded by the ESRC as part of its Economic Beliefs and Behaviour programme.