financial education


Friends of the Behavioral Economics Blog, this week we present the paper “Depression and financial planning horizon”, by Choung, Y.; Chatterjee, S. and Pak, T. Y. (2022), in which authors carry out a study with people from different generations to understand how suffering from depression affects the decisions we make in the financial context. 

Recent observations and studies have pointed, in recent years, to altered reward processing in people living with depression, considering that hopelessness is part of the clinical picture of the disease.

Depressed mood is often also associated with a lack of positive expectations, which may affect people’s motivation to invest in the future. 

That is, empirical evidence suggests that people with depression often do not accept future rewards compared to people without mental health difficulties.

Of these future rewards, most are financial. And one way to measure and organize personal finances is the so-called “financial planning horizon.” That is, the prospective period according to which people organize their savings and spending programs. An example of this is taking out a retirement plan, which would indicate a very broad and long financial planning horizon over time.

While most people look to the future with a certain amount of optimism, this is often not the case for people with depression. And because studies consider that a large number of factors affect the financial planning horizon, such as, for example, individual health or personality, authors found it interesting to investigate the role of depression in this context.

Approximately 17.3 million adults in the United States have experienced one or more major depressive episodes since 2017. Moreover, the number of depressed adults who reported unmet needs in the treatment of their illness has been progressively increasing over the past 10 years in that same territory.  

Given the increasing prevalence of depression and its potential economic consequences, there is a growing need to understand how the symptoms of this illness affect financial decision making. 

The most recent evidence suggests that depressive symptomatology is related to temporal discounting and risk aversion. That is, on the one hand, it is possible that depression influences the time frame in which people schedule their savings and spending, because they may prefer immediate rewards to those for which there is a wait; and on the other hand, depression may influence people’s propensity to make risky decisions because it alters their personality traits and behavior. That is this issue that interests the authors and on which they try to shed light. 

Some articles on the subject show that there are a number of changes in time preferences for rewards after experiencing traumatic experiences such as natural disasters or armed conflicts. These events result in stress, which, in general, is an important precursor of depression.

To study all these ideas, authors used a sample composed of five different cohorts of people born between 1931 and 1959. A series of scientifically valid scales common in psychology were used to assess depressive symptoms. In addition, questions related to the financial area were asked.

Authors’ results suggest that people with depression are more likely to focus their financial planning on the short term. Moreover, it appears that these differences in relation to the rest of the population were driven not only by depression, but also by pessimism, poor perceived control, smoking, alcohol consumption, lack of exercise….

Overall, the results point to a strong association between depressive symptoms and a shorter financial planning horizon. This may be explained by the pessimistic outlook of those living with this disease, as well as by the underestimation of the years that the ill person considers he or she has left to live, which is further reduced if depression is accompanied by deteriorating physical health or cognitive losses. 

Authors hope that further studies on depression and how it affects the normal development of life will be carried out, with the aim of intervening and improving the negative symptoms. 

For example, they propose the creation of affordable financial planning services, so that anyone can access them and, thus, make it easier for everyone to manage their finances in a healthy and forward-looking way. 

If you want to know more about Behavioral Economics and how to apply it to human behavior, take a look to our Master of Science in Behavioral Economics, a 100% online program that you can take in Spanish or English. Ask us about our grants!

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