Financial and environmental sustainability

Modern society faces a crisis of sustainability on both financial and environmental issues. Much of modern society depends on unsustainable levels of consumption. We are seeing increasing attention on environmental degradation and risks associated with climate change. Across the developed world, we are also facing a crisis of financial sustainability and these problems are also directly related to consumption decisions. To create an environmentally- and financially-sustainable future, we need to become better stewards of wealth and natural resources.

In personal finance, people save far too little and endanger their ability to maintain a reasonable income as they grow older (also see this paper). The data on savings rates shows that people are massively discounting their future needs in order to support higher consumption today. This same description could be applied to environmental issues as well.

There is a narrative that technology can improve efficiency to the point that we don’t need to reduce our material consumption to reach a sustainable environmental state, but the research suggests otherwise. As technology makes things less expensive, we simply tend to use more. Air travel, for example, is vastly more efficient than in previous decades but the pollution from air travel is growing rapidly. More efficient air travel makes it cheaper so people fly more. Bottom line: there is no rational belief in the idea that potential gains technology removes the need for conservation, but we believe this because we want to.

There is also an oft-used idea that justifies personal inaction with reducing environmental impact because that is just the way everyone behaves. We rationalize based on the idea of that lots of people make the same choices (what is referred to as diffusion of responsibility).

There are similar narratives for rationalizing consumer spending over saving. People predict that they will earn more and save more in the future, thereby making themselves feel better about current decisions. People also tend to rationalize consumption decisions that they simply want to make. We convince ourselves that we deserve something because we work hard or that some home improvement we desire is a good investment. Given the emerging data on the retirement crisis, it is clear that many people are consuming way beyond their means.

Our inability or unwillingness to manage consumption of financial resources parallels the resistance to reducing consumption of energy for the environmental good. This is problematic when a big part of the solutions to both environmental and financial issue is simply to consume less.