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Behavioural Characteristics and Financial Distress

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  • McCarthy, Yvonne

    (Central Bank of Ireland)

Abstract

Using a new nationally representative survey of financial capability and experience in the UK and Ireland, I investigate the key factors that cause individuals to experience financial distress. In this context, a key area that I focus on is whether individuals’ behavioural traits, such as their capacities for self-control, planning, and patience, affect their ability to stay out of financial trouble. I find that the variables that proxy for these behavioural characteristics are both statistically significant and economically important for predicting both mild and extreme forms of financial distress, in a regression controlling for demographic and socio-economic factors. Furthermore, behavioural traits emerge as having a stronger impact on the incidence of financial distress than education or financial literacy. The results raise questions about whether policy can be oriented towards improving financial habits and mitigating the impact of behavioural characteristics on personal finances.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 6/RT/11.

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Date of creation: Mar 2011
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Handle: RePEc:cbi:wpaper:6/rt/11

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Keywords: Personal Finance; Financial Strain; Debt; Behaviour; Financial Literacy;

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References

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  1. Boheim, Rene & Taylor, Mark P., 2000. "My Home Was My Castle: Evictions and Repossessions in Britain," Journal of Housing Economics, Elsevier, Elsevier, vol. 9(4), pages 287-319, December.
  2. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, American Finance Association, vol. 64(6), pages 2807-2849, December.
  3. John Ameriks & Andrew Caplin & John Leahy, 2002. "Wealth Accumulation and the Propensity to Plan," NBER Working Papers 8920, National Bureau of Economic Research, Inc.
  4. Annamaria Lusardi & Peter Tufano, 2009. "Debt Literacy, Financial Experiences, and Overindebtedness," NBER Working Papers 14808, National Bureau of Economic Research, Inc.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Behavioural Economics and Irish Public Policy
    by Liam Delaney in The Irish Economy on 2011-04-12 00:40:31
  2. Behavioural Economics and Irish Public Policy
    by Liam Delaney in Economics, Psychology and Policy on 2011-04-12 02:14:00
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Cited by:
  1. Elisabeth Beckmann & Helmut Stix, 2014. "Foreign currency borrowing and knowledge about exchange rate risk," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 188, Oesterreichische Nationalbank (Austrian Central Bank).
  2. C. Giannetti & M. Madia & L. Moretti, 2013. "Job Insecurity and Financial Distress," Working Papers wp887, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Barbara Cavalletti & Corrado Lagazio & Daniela Vandone & Elena Lagomarsino, 2012. "The role of financial position on consumer indebted-ness. An empirical analysis in Italy," DEP - series of economic working papers, University of Genoa, Research Doctorate in Public Economics 8/2012, University of Genoa, Research Doctorate in Public Economics.
  4. Piotr Bialowolski & Dorota Weziak-Bialowolska, 2014. "The Index of Household Financial Condition, Combining Subjective and Objective Indicators: An Appraisal of Italian Households," Social Indicators Research, Springer, Springer, vol. 118(1), pages 365-385, August.
  5. Marianna Brunetti & Elena Giarda & Costanza Torricelli, 2012. "Is financial fragility a matter of illiquidity? An appraisal for Italian households," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance), Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi" 12061, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
  6. Brown, Martin & Graf, Roman, 2012. "Financial Literacy, Household Investment and Household Debt: Evidence from Switzerland," Working Papers on Finance, University of St. Gallen, School of Finance 1301, University of St. Gallen, School of Finance.
  7. Lunn, Pete, 2012. "Can Policy Improve Our Financial Decision-Making?," Papers, Economic and Social Research Institute (ESRI) EC8, Economic and Social Research Institute (ESRI).
  8. Elisabete Santos & Margarida Abreu, 2013. "Financial Literacy, Financial Behaviour and Individuals’ Over-indebtedness," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2013/11, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.

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