According to the model of intertemporal choice, what are the major factors which determine how much saving an individual will do? What factors might a behavioral economist use to explain savings decisions?

The model of intertemporal choice is an economic concept that helps us understand how people make decisions regarding consumption and saving over time. Factors that determine the amount of saving an individual will do according to this model include the following: 1. Income: An individual's level of income determines the amount of money available for consumption and saving. Those with higher incomes are more likely to save, while those with lower incomes may consume more or even borrow money. 2. Interest rates: High interest rates encourage saving, as higher returns can be obtained from saving money in interest-bearing instruments like bank deposits. Low interest rates, on the other hand, encourage borrowing and spending to take advantage of the cheap cost of borrowing. 3. Time preference: Time preference reflects an individual's preference to consume goods and services now or in the future. A person with a high time preference is more likely to spend money now, while someone with a low time preference might choose to save money today for future consumption. 4. Inflation: Inflation erodes the value of money. High inflation discourages saving, as the value of money saved decreases over time. Low inflation, on the other hand, encourages individuals to save more for the future.

A behavioral economist might consider additional factors, informed by psychological and cognitive research, to explain individual savings decisions. Some of these factors include: 1. Financial literacy: Financial literacy refers to an individual's ability to make informed decisions about financial planning, saving, and spending. People with higher financial literacy are more likely to engage in saving, while those with low financial literacy might struggle to plan for their future needs effectively. 2. Mental accounting: People tend to allocate money to specific mental categories (e.g. spending, saving, investing) and often have rules and goals for each category. These mental accounts can impact their savings decisions, as they may be more likely to save when they perceive funds as being earmarked for a specific purpose. 3. Loss aversion: People tend to be more sensitive to losses than gains. The fear of losing money can impact an individual's decision to save, as they may not want to risk losing their savings through investment or other risky financial behaviors. 4. Anchoring: Anchoring refers to the cognitive bias of relying on the first piece of information encountered when making decisions. For example, an individual might anchor on a specific savings goal or a particular interest rate, which can in turn influence their savings decisions. 5. Present bias: Present bias is the tendency to overvalue immediate rewards while undervaluing future rewards. People who exhibit extreme present bias are less likely to save for the future, as they prefer to derive immediate benefits from their income rather than saving for long-term gains.