Financial Stress and Asymmetric Financial Decisions

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