ucts and how much financial planning they engage in. The surveys also asked respondents
various questions that can be used to assess behavioural and psychological traits and the
UK survey contained questions that assessed basic financial literacy. While some previ-
ous work on financial distress has employed samples that have some of these features, the
Financial Capability Surveys are unique in having all of them.
Relative to the existing literature, therefore, this paper is the first to use a large repre-
sentative sample to examine the effects of behavioural characteristics on financial distress
rather than on asset accumulation, which is the focus of a number of other papers (Ameriks
et al (2003) or Lusardi and Mitchell (2007), for example).1 To the author’s knowledge, the
paper is also the first to focus on both mild and extreme forms of financial distress. A num-
ber of previous papers have studied extreme forms of financial distress such as mortgage
arrears, default and repossessions. This sort of analysis is no doubt important, but it only
presents part of the picture as to why people get into financial trouble. It neglects the fact
that people may experience ‘milder’ forms of financial distress long before they default on
large debt obligations such as mortgages, and of course, people who do not have large debt
obligations might still get into financial difficulties.
The rest of this paper is structured as follows: In the next section I examine the existing
literature on the causes of financial distress. In Section 3 I introduce the data used in the
current study and present a socio-demographic and behavioural overview of the sample
according to individuals’ degree of financial distress. Section 4 covers the econometric tech-
niques used and presents the model results. In Section 5 I examine the issue of endogeneity
and reverse causality. Finally, Section 6 summarises and concludes.
2 Literature Review
In examining the literature on behaviour and financial distress, a number of points emerge.
Firstly, while certain recent studies examine the effect of behavioural traits such as plan-
ning on financial outcomes, these studies have tended to be based on data for the United
States and focussed on the impact of planning on net worth, rather than financial distress.
Ameriks et al (2003), for example, examine the role of planning in explaining why differ-
ent households end up with different levels of wealth. Using survey data for individuals
1 While a relatively small literature does examine the effect of behaviour on financial distress, the sample
sizes used in these studies tend to be small and are not nationally representative - see Livingstone and Lunt
(1992) for example.