Decision makers often save money for a specific goal by forgoing discretionaryconsumption and instead putting the money toward the savings goal. Wehypothesized that reference points can be exploited to enhance this type ofsaving. In two hypothetical scenario studies, subjects made judgments of theirlikelihood to forgo a small expenditure in order to put the money toward thesavings goal. In Experiment 1, judgments were higher if the savings goal waspresented as composed of weekly subgoals (e.g., save $60 per week to buya $180 iPod). Experiment 2 replicated this finding and demonstrated thatthe subgoal manipulation increased judgments of likelihood to save money onlywhen the money saved from the foregone consumption would allow the decisionmaker to meet the weekly subgoal exactly (not under or overshoot it). Theseresults suggest a reference point mechanism and point to ways that behavioraldecision research can be harnessed to improve economic behaviors.

We examine a decision theoretic model of portfolio choice in which investors face income risk that is not directly insurable. We consider the sensitivity of savings and portfolio allocation rules to different assumptions about utility, the stochastic process for income and asset returns, and market frictions (transactions costs and short-sale constraints). Under CRRA time additive utility, habit persistence utility, and for a broad range of parameterizations, the model predicts that investors wish to borrow and invest all of their savings in stocks. This qualitative implication is robust to the introduction of significant transaction costs in the stock market, and contrasts sharply with portfolio allocation models in which there is no labor income.