How Does Consumers' Financial Vulnerability Relate to Positive and Negative Financial Outcomes? The Mediating Role of Individual Psychological Characteristics

Abstract

Vulnerable consumers are at particular risk of financial detriment due to, for example, low financial literacy or numeracy, high debt, low income, or impactful changes in personal circumstances. We introduce a comprehensive and formative measure of financial vulnerability that integrates these risk factors and is grounded in definitions of vulnerability from financial regulation bodies and government agencies such as the Consumer Financial Protection Bureau. Across three studies of US individuals, we assess the nomological validity of this measure of financial vulnerability through its relationship with positive and negative financial outcomes (e.g., savings levels, paying credit card balances in full each month, being in arrears) as well as relevant psychological characteristics (e.g., personal savings orientation [PSO], money management skills, financial self‐efficacy). Moreover, we examine whether and how these psychological characteristics mediate the relationship between financial vulnerability and financial outcomes. We conclude with an overview of implications for policy makers and business practitioners.

Do good things come in pairs? How personality traits help explain individuals' simultaneous pursuit of a healthy lifestyle and financially responsible behavior

“…Accordingly, a sense of agency over one's life outcomes is valuable in engaging in beneficial behaviors across different domains of daily decision‐making. This finding extends work showing the importance of self‐efficacy in individuals' ability to cope with economic risks (Engelberg, 2007), and work showing the importance of individuals' self‐assuredness or “self‐belief” in their capabilities to explain their engagement in positive financial behaviors (e.g., Farrell et al ., 2016; Hoffmann and McNair, 2019).…”

“…Recent work suggests that psychological variables can offer novel insights to guide policy interventions, such as in the context of poverty alleviation (e.g., Haushofer and Fehr, 2014) and when supporting financially vulnerable individuals (Hoffmann and McNair, 2019). Furthermore, policymakers in the U.S. (CFPB, 2013) as well as the U.K. (Money Advice Service, 2015) stress the role of psychological characteristics in better understanding individuals' financial capability.…”

“…Specifically, during the planning and implementation of intervention strategies, the provision of factual information needs to be complemented by design elements that accommodate the behavioral disposition of the individuals expected to act upon this information. In this regard, recent work emphasizes the importance of taking into account psychological factors to better understand individuals' financial behavior (Hoffmann and McNair, 2019).…”

Improving Debt Literacy by 2/3 Through Four Simple Infographics Requires Numeracy and Not Focusing on Negatives of Debt

“…The second aim of our study is to test whether visual attention focused on positive or negative aspects of debt, numerical literacy, graph literacy, and linguistic literacy moderates the effectiveness of financial education. Previous studies have shown that these factors may play an important role in learning effectiveness and in financial literacy acquisition (Banks and Oldfield, 2007 ; Okan et al, 2016 ; Hoffmann and McNair, 2019 ).…”

Resilience and well‐being production among vulnerable consumers facing systematic constraints

“…Consumer vulnerability is commonly conceptualized as a state of powerlessness, which arises from an interaction of individual characteristics (e.g., age, health, cognitive capacity, socioeconomic status); individual states (e.g., life transitions), and external conditions (e.g., discrimination) (Baker et al ., 2005). Vulnerable consumers have also been referred to as “at‐risk consumers,” with limited ability to engage in a marketplace (Hoffmann and McNair, 2018). Zooming in the consumer vulnerability among internal migrant workers in China with a focus on consumer resilience, this research initiates a much‐needed discussion on the process of well‐being production among vulnerable consumers.…”