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Behavioural Characteristics and Financial Distress

Author

Listed:
  • 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.

Suggested Citation

  • McCarthy, Yvonne, 2011. "Behavioural Characteristics and Financial Distress," Research Technical Papers 6/RT/11, Central Bank of Ireland.
  • Handle: RePEc:cbi:wpaper:6/rt/11
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    References listed on IDEAS

    as
    1. Lusardi, Annamaria & Tufano, Peter, 2015. "Debt literacy, financial experiences, and overindebtedness," Journal of Pension Economics and Finance, Cambridge University Press, vol. 14(04), pages 332-368, October.
    2. 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.
    3. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
    4. John Ameriks & Andrew Caplin & John Leahy, 2002. "Wealth Accumulation and the Propensity to Plan," NBER Working Papers 8920, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Marianna Brunetti & Elena Giarda & Costanza Torricelli, 2016. "Is Financial Fragility a Matter of Illiquidity? An Appraisal for Italian Households," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(4), pages 628-649, December.
    2. 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: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 118(1), pages 365-385, August.
    3. Brown, Martin & Graf, Roman, 2013. "Financial Literacy, Household Investment and Household Debt: Evidence from Switzerland," Working Papers on Finance 1301, University of St. Gallen, School of Finance.
    4. repec:rss:jnljms:v3i9p4 is not listed on IDEAS
    5. Caterina Giannetti & Marianna Madia & Luigi Moretti, 2014. "Job insecurity and financial distress," Applied Financial Economics, Taylor & Francis Journals, vol. 24(4), pages 219-233, February.
    6. Elisabete Santos & Margarida Abreu, 2013. "Financial Literacy, Financial Behaviour and Individuals’ Over-indebtedness," Working Papers Department of Economics 2013/11, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    7. Beckmann, Elisabeth & Stix, Helmut, 2015. "Foreign currency borrowing and knowledge about exchange rate risk," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 1-16.
    8. Biljanovska, Nina & Palligkinis, Spyros, 2014. "Control thyself: Self-control failure and household wealth," SAFE Working Paper Series 69, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    9. Elisabeth Beckmann, 2017. "How does foreign currency debt relief affect households’ loan demand? Evidence from the OeNB Euro Survey in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-32.
    10. Lunn, Pete, 2012. "Can Policy Improve Our Financial Decision-Making?," Papers EC8, Economic and Social Research Institute (ESRI).
    11. 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.
    12. repec:eee:jbfina:v:92:y:2018:i:c:p:280-294 is not listed on IDEAS
    13. Brian Lucey & Charles Larkin, 2012. "Risk Tolerance and Demographic Characteristics: Preliminary Irish Evidence," The Institute for International Integration Studies Discussion Paper Series iiisdp406, IIIS.
    14. Marianna Brunetti & Elena Giarda & Costanza Torricelli, 2016. "Is Financial Fragility a Matter of Illiquidity? An Appraisal for Italian Households," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(4), pages 628-649, December.

    More about this item

    Keywords

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

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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