Non Technical Summary
Financial distress at an individual and household level can have serious consequences which
go far beyond those experienced by the individual or household involved. The current
financial crisis, which stemmed in large part from poor financial decisions and heightened
financial distress among households around the world, and its enormous fiscal cost, is a
clear reminder of this fact. In this context, understanding why people get into financial
difficulties is key to devising policies to prevent future episodes of heightened financial
distress. Using data from a new survey of financial capability and experience in the UK
and Ireland, this study addresses this issue.
In examining the issue of what the key drivers of financial distress are, this study goes
beyond the results already available in the existing literature, by incorporating information
on behavioural characteristics in addition to financial literacy, socio-economic and demo-
graphic factors. Specifically, a key area that this study focuses on is whether an individual’s
capacity for self-control, planning and patience affects their ability to manage their finances
and stay out of financial trouble. The results show that behavioural factors are important
determinants of financial difficulties; people who are impulsive are more likely to get into
financial difficulties than people who are not impulsive, and this result applies even if a
person is well educated and financially literate. Similarly impatient or disorganised people
are also more likely to experience financial distress.
The results show that policy efforts to prevent financial difficulties must go beyond
solely trying to improve financial literacy and education levels, which also matter. Instead,
these efforts should be combined with tools to improve individuals’ organisation skills and
devices to, as much as is possible, minimise the impact of behavioural and psychological
traits on financial outcomes.