Financial Stress and Asymmetric Financial Decisions

PERI Working Paper No. 243

28 Pages Posted: 15 Feb 2012

See all articles by Christian E. Weller

Christian E. Weller

University of Massachusetts Boston - Department of Public Policy and Public Affairs; University of Massachusetts Boston - Gerontology Institute; Political Economy Research Institute

Amy Helburn

affiliation not provided to SSRN

Date Written: December 12, 2010

Abstract

Building wealth requires saving, borrowing, and investing. These decisions may depend on stress due to the lack of financial security (low financial assets). Stress should influence personal responses – emotional, behavioral, and cognitive – that in turn could determine financial decisions. The link between stress and financial decisions could be asymmetric, so that fewer financial assets result in larger absolute financial decisions than more assets. We first divide households between stressed (financially insecure) and not stressed (financially secure) ones, using a threshold regression. Comparatively little assets divide stressed and not stressed households. We then show that low levels of financial assets have a larger adverse effect on personal responses among stressed households than among not stressed ones. Personal responses, though, systematically determine financial decisions, such that more stress and lower personal responses lead to a more short-term focus in financial decisions. These linkages between stress, personal responses, and financial decisions indeed give rise to an asymmetric effect. The absolute effect of a stock price decrease of 30%, for instance, is 28% larger than the effect of a 30% stock price increase. Exogenous asset shocks could result in a reduced focus on long-term wealth building among households, because of the asymmetric effect of financial stress.

Keywords: financial decisions, financial stress, personal investing

JEL Classification: D12, D82, G11

Suggested Citation

Weller, Christian E. and Helburn, Amy, Financial Stress and Asymmetric Financial Decisions (December 12, 2010). PERI Working Paper No. 243, Available at SSRN: https://ssrn.com/abstract=2004765 or http://dx.doi.org/10.2139/ssrn.2004765

Christian E. Weller (Contact Author)

University of Massachusetts Boston - Department of Public Policy and Public Affairs ( email )

McCormack Graduate School
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Boston, MA 02125
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HOME PAGE: http://blog.umb.edu/christianweller

University of Massachusetts Boston - Gerontology Institute ( email )

100 Morrissey Boulevard
Boston, MA 02125-3393
United States

Political Economy Research Institute ( email )

Amherst, MA
United States

Amy Helburn

affiliation not provided to SSRN ( email )

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