Locus of Control and Savings


29 June 2015

This paper analyses the relationship between individuals’ locus of control and their savings behaviour, i.e. wealth accumulation, savings rates and portfolio choices. Locus of control is a psychological concept that captures individuals’ beliefs about the controllability of life events and is a key component of self-control. We find that households with an internal reference person save more both in terms of levels and as a percentage of their permanent incomes. Although the locus-of-control gap in savings rates is largest among rich households, the gap in wealth accumulation is particularly large for poor households. Finally, households with an internal reference person and average net worth hold significantly less financial wealth, but significantly more pension wealth, than otherwise similar households with an external reference person.*

Governments increasingly regard households’ savings rates, asset portfolios and wealth levels as key targets for public policy intervention.

The goal of this paper is to contribute to this emerging policy debate by empirically analysing the link between individuals’ locus of control and their savings behaviour. Those with an external locus of control generally attribute life’s outcomes to external factors (e.g. fate, luck and other people) while those with an internal locus of control believe that much of what happens in life stems from their own actions. Psychologists argue that a key determinant of both self-control and motivation (i.e. effort) is an individual’s belief that his or her actions will lead to the desired outcome. Thus, perceptions of control are central to understanding individuals’ ability to avoid immediate temptation and achieve their long-term goals.

Our analysis utilises the Household, Income and Labour Dynamics in Australia (HILDA) Survey, which provides extremely detailed data on both assets and financial liabilities for a large, nationally representative sample of households at three separate points in time.


Behavioural savings models emphasise the tension between temptation and self-control in shaping households’ consumption, expenditure and savings decisions. To the extent that their predictions characterise behaviour, they have the potential to not only enhance our understanding of economic decision making, but also to expand the spectrum of policy options that could be used to assist households in meeting their long-term objectives.

Consistent with the predictions of behavioural savings theory, we find that an internal locus of control is related to higher savings both in levels and as a fraction of permanent income. For wealthy households, this manifests itself as a gap in the rate of savings relative to permanent income. For poor households, there is a large disparity in the amount of wealth accumulated over time. Locus of control is also related to the way that equally wealthy households allocate their wealth across asset types with households that have an internal reference person holding significantly less financial wealth, but significantly more pension wealth.

Unfortunately, differences in sample selection and estimation strategies make it nearly impossible to directly compare the magnitude of results derived from different studies of savings behaviour, even when concepts are defined and measured similarly. Our results, however, lead us to conclude that perceptions of control may be as important as human capital and cognitive skills in explaining heterogeneity in wealth accumulation and portfolio allocations.

We find substantial effects of locus of control on savings behaviour despite controlling for educational attainment and permanent income. Our results indicate that for individuals with an internal locus of control this may also translate into savings behaviour that leads to very real gains in economic well-being.

Economic conditions and self-control problems may interact in ways that generate poverty traps, for example. Unfortunately, our analysis does not permit us to examine whether the rich exercise more self-control than the poor. We do find, however, that the relative wealth payoff associated with having an internal locus of control is much greater at the 25th percentile of the wealth distribution than it is at the 75th percentile. For the poor, economic well-being and self-control may be very closely linked.

Our results show that households in which the reference person has an external locus of control save less and allocate less wealth to their pensions making them a sensible group to target for intervention.

Taken together, our results shed light on the relationship between locus of control, wealth accumulation, savings rates and portfolio choices. Despite this, they leave a number of questions unanswered. In particular, why does locus of control matter? What is the mechanism linking households’ locus of control to their savings behaviour?

In keeping with the psychological evidence, we have focused on the role of locus of control as one important component of self-control. Yet with observational data we cannot rule out other plausible, potentially related hypotheses. Future research which explored these mechanisms using a variety of research strategies and data sources would be extremely valuable.

* This paper uses unit record data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey. The HILDA Project was initiated and is funded by the Australian Government Department of Social Services (DSS) and is managed by the Melbourne Institute of Applied Economic and Social Research (Melbourne Institute).The findings and views reported in this paper, however, are those of the authors and should not be attributed to either DSS or the Melbourne Institute. The authors are grateful for financial support from an Australian Research Council Discovery Grant.