Behavioral consequences and intervention of financial shocks

Abstract

An increasing number of individuals report hardship to cover financial shortfalls, but most research to date examines expense shocks (e.g., a car repair) rather than income shocks (e.g., a one-time pay cut). Here we explore the behavioral consequences of expense and income shocks and propose a self-affirmation intervention to mitigate the psychological toll posed by financial shocks. In three experiments, participants were presented with a hypothetical financial emergency (i.e., a one-time income shock or expense shock) and answered questions afterwards. We found that income shocks evoked more methods of coping, were harder to cope with, more impactful on daily life, and perceived as more of a loss than expense shocks of the same amount. Self-affirmation as a behavioral intervention successfully mitigated some of the deleterious effects of the shocks. The findings contribute a more nuanced understanding of decision making in response to shortfalls by differentiating income and expense shocks. Our study suggests that there are psychological distinctions in how different financial shocks are perceived. This evidence can inform the strategies used to prevent and cope with financial emergencies and inform public policy to support household financial management.