Behavioural Characteristics and Financial Distress

Behavioural Characteristics and Financial Distress

Yvonne McCarthy

Central Bank of Ireland*

Draft version: January 2011

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, af-
fect 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 regres-
sion 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.

Keywords: Personal Finance, Financial Strain, Debt, Behaviour, Financial Literacy.

*E-mail: [email protected]. The views expressed in this paper are those of the author
and do not necessarily reflect those of the Central Bank of Ireland or the European Central Bank. The
author would like to thank Karl Whelan, Liam Delaney, Ron Davies and Denis Conniffe of University College
Dublin, as well as participants at a Central Bank of Ireland seminar and an anonymous referee, for helpful
comments. The author is responsible for any remaining errors.

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