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Behavioural characteristics and financial distress

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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. JEL Classification: C25, D14.

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1303.

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Length: 35 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:ecb:ecbwps:20111303

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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, 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, vol. 64(6), pages 2807-2849, December.
  3. John Ameriks & Andrew Caplin & John Leahy, 2003. "Wealth Accumulation And The Propensity To Plan," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 1007-1047, August.
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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. Lunn, Pete, 2012. "Can Policy Improve Our Financial Decision-Making?," Papers EC8, Economic and Social Research Institute (ESRI).
  2. 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) 12061, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
  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 8/2012, University of Genoa, Research Doctorate in Public Economics.

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