Abstract
The Coronavirus disease 2019 (COVID-19) pandemic has helped expose and exacerbate individuals’ and households’ financial vulnerability worldwide. Meanwhile, behavioral elements affecting low-income populations’ ability to save and become more financially resilient have yet to receive sufficient academic attention. This exploratory study aims at the beginning to help elucidate the determinants of low-income individuals’ real-life savings behavior by utilizing laboratory performance measures (to characterize participants’ risk preferences by using the Balloon Analog Risk Task – BART, in study 1), as well as self-report surveys (to characterize participants’ personality traits, in study 2). Combining results from both studies, latent personality traits (i.e., attitude towards risk, perseverance, distractibility, and state anxiety) are found to affect the risk preferences of low-income individuals (captured using a novel BART performance measure indicative of an individual’s strategic risk preference adaptation), which in turn impact their ability to successfully complete matched savings programs and, thus, their ability to save and enhance their financial resilience.
Highlights
According to the Center on Budget and Policy Priorities (CBPP) COVID-19 Hardship Watch, in the U.S the “pandemic and the economic fallout have been widespread but are prevalent among Black, Latino, Indigenous, and immigrant households” (CBPP, 2020, p. 1)
We found that effective pump bet (EPB) was positively correlated with savings behavior [r(24) = 0.58, p = 0.003], indicating that participants exhibiting adaptive risk preferences tended to end up with higher total savings (Figure. 4A)
Attitude towards risk (ATR) was selected as a latent variable in all four models (Table 5), as well as state anxiety, which seemed intuitive given that our study focused on low-income participants
Summary
According to the Center on Budget and Policy Priorities (CBPP) COVID-19 Hardship Watch, in the U.S the “pandemic and the economic fallout have been widespread but are prevalent among Black, Latino, Indigenous, and immigrant households” (CBPP, 2020, p. 1). Several studies prompted by the great recession of 2008 demonstrated how fragile and vulnerable Americans were to financial shocks. Lusardi (2011) examined Americans’ self-reported ability to withstand shocks and found that “only 49 percent of respondents have set aside emergency or rainy day funds that would cover expenses for 3 months in case of sickness, job loss, economic downturn, or other emergencies. Many families would not be able to draw on personal financial resources if hit by a shock” In a similar study, “half of Americans report that they would probably or certainly be unable to cope” with “an unexpected need in the month that required them to come up with $2,000” In a similar study, “half of Americans report that they would probably or certainly be unable to cope” with “an unexpected need in the month that required them to come up with $2,000” (Lusardi et al, 2011, p. 9)
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