Behavioral consequences of income and expense shocks

Abstract

Despite the increasing prevalence of short-term income shocks (e.g., a temporary pay cut), research on how individuals’ financial resilience to these shocks differs from expense shocks (e.g., car repairs) is underdeveloped. Here we build on prior research that explores the behavioral consequences of income and expense shocks and propose an intervention to mitigate the psychological toll posed by such shocks. Across three experiments, participants were presented with either a one-time income or a one-time expense shock and answered questions afterward. We found that one-time income shocks evoked more methods of coping, were harder to cope with, more impactful on daily life, and perceived as a greater loss than expense shocks of the same amount. A self-affirmation intervention successfully mitigated some of these deleterious effects. By differentiating one-time income shocks from one-time expense shocks, these findings provide a more nuanced understanding of decision-making during financial shortfalls. This evidence contributes to strategies used to manage financial emergencies and informs public policy to support household financial management.