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

• Published date: 01 December 2019
• Author: Arvid O. I. Hoffmann,Simon J. McNair
• Date: 01 December 2019
• DOI: http://doi.org/10.1111/joca.12233

1630 THE JOURNAL OF CONSUMER AFFAIRS

ARVID O. I. HOFFMANN AND SIMON J. MCNAIR

How Does Consumers’ Financial Vulnerability Relate to

Positive and Negative Financial Outcomes? The

Mediating Role of Individual

Psychological Characteristics

Vulnerable consumers areat particular risk of nancial detriment due

to, for example, low nancial literacy or numeracy, high debt, low

income, or impactful changes in personal circumstances. We introduce

a comprehensive and formative measure of nancial vulnerability that

integrates these risk factors and is grounded in denitions of vulnerabil-

ity fromnancial regulation bodies and government agencies such as the

Consumer Financial Protection Bureau.Across three studies of US indi-

viduals, we assess the nomological validity of this measure of nancial

vulnerability through its relationship with positive and negative nan-

cial outcomes (e.g., savings levels, paying credit card balances in full

each month, being in arrears) as well as relevant psychological charac-

teristics (e.g., personal savings orientation [PSO], money management

skills, nancial self-efcacy). Moreover, we examine whether and how

these psychological characteristics mediate the relationship between

nancial vulnerability and nancial outcomes. We conclude with an

overview of implications for policy makers and business practitioners.

Today’s consumers face increasing self-responsibility for making conse-

quential nancial decisions affecting their immediate as well as future

nancial well-being. For instance, an ongoing shift from dened benet to

dened contribution plans heightens individuals’ responsibility for manag-

ing their own pension savings and preparing for retirement (Deetlefs et al.

In press; van Rooij, Lusardi, and Alessie 2011), transferring the burden of

smoothing consumption over one’s lifetimefrom pension plan providers to

Arvid O. I. Hoffmann (arvid.hoffmann@adelaide.edu.au) is a Professor in Marketingat University

of Adelaide Business School, and Simon McNair (s.j.mcnair@leeds.ac.uk) is a Leverhulme Early

Career Research Fellow at Leeds University Business School. Both authors contributedequally to this

article and are listed in alphabetical order.We thank the Editor, Ron Hill, and three anonymous review-

ers for their constructivefeedback and guidance. We thank WandiBruine de Bruin as well as conference

participants at the Behavioral Finance Working Group Conference at Queen Mary University of

London; the Subjective Probability, Utility and Decision Making (SPUDM) Conference; the Society

of the Advancement of Behavioral Economics (SABE) Conference; the Society for Judgment and

Decision Making (SJDM) Conference; and the 26th Annual Colloquium on Pensions and Retirement

Research at University of New South Walesfor helpful feedback on previous versions of this article.

The Journal of Consumer Affairs, Winter 2019: 1630–1673

DOI: 10.1111/joca.12233

Copyright 2018 by The American Council on Consumer Interests

WINTER 2019 VOLUME 53, NUMBER 4 1631

individual consumers (Alessie and Lusardi 1997; Browning and Crossley

2001). However, given overall low levels of nancial literacy and drop-

ping household savings rates (Organisation for Economic Cooperation and

Development 2017), many consumers seem either ill-prepared or unable

to take on increased nancial responsibility. Indeed, only 57% of all US

consumers understand basic concepts within personal nance (Klapper,

Lusardi, and van Oudheusden 2015), while many consumers are also at

risk of spending their retirement funds too quickly given the widespread

presence of hyperbolic discounting (Laibson 1998).

Aforementioned challenges are magnied for so-called “vulnerable”

consumers, for whom the negative consequences of poor nancial choices

are even direr (Financial Conduct Authority (FCA) 2015). Consumer vul-

nerability is commonly conceptualized as a limited ability to engage effec-

tively in the marketplace or 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, Gentry, and Ritten-

burg 2005). Vulnerable consumers have also been referred to as “at-risk

consumers,” who are conceptualized as “marketplace participants who,

because of historical or personal circumstances or disabilities, may be

harmed by marketers’ practices or may be unable or unwilling to take full

advantage of marketplace opportunities” (Pechmann et al. 2011, 23).

Vulnerable consumers are at particular risk of nancial detriment as a

result of, for example, low nancial literacy or numeracy, high debt, low

income, or impactful changes in personal circumstances, such as the death

of a spouse or redundancy (FCA 2015). While different regulatory, statu-

tory, and consumer advocacygroups variously dene consumers’ nancial

vulnerability, overlaps exist, and there is a consensus that vulnerable

consumers are at particular nancial disadvantage. They are more likely to

make poor nancial choices and suffer nancially when nancial service

providers do not act with appropriate levels of care (Personal Finance

Research Centre 2017). Moreover, their nancial stability is tenuous

(Consumer Financial Protection Bureau (CFPB) 2013), and their behavior

is controlled more by short-term circumstances (Bertrand, Mullainathan,

and Shar 2006).

More generally, academic research has observed that nancial difculty

can yield negative impacts in psychological terms, such as reducing peo-

ples’ cognitive capacities (Mullainathan and Shar 2013), and increasing

stress levels (Brown, Taylor, and Wheatley Price 2005; Gathergood 2012).

Psychologically, stress is known to trigger a shift from goal-directed

to more habitual behavior (Schwabe and Wolf 2009). Furthermore, key

1632 THE JOURNAL OF CONSUMER AFFAIRS

risk factors of vulnerability, such as living in poverty, are known to yield

increases in time discounting (Haushofer and Fehr 2014), shifting people’s

focus from more distant to more present considerations. Such research has

implications for several nancial behaviors such as saving (Soman and

Zhao 2011; Ülkümen and Cheema 2011), and managing one’s nances

(Ameriks, Caplin, and Leahy 2003)—behaviors that are typically con-

ceptually characterized as entailing longer-term goal-directed behavior.

Financial self-efcacy, similarly, is known to mediate the relationship of

nancial literacy—another key risk factor for nancial vulnerability—with

nancial outcomes (Fernandes, Lynch, and Netemeyer 2014; Peeters et al.

2018; Perry and Morris 2005). Together, the above research invites the

suggestion that consumers facing difcult nancial circumstances may

experience psychological, as well as nancial consequences.

Against this backdrop, understanding the role of vulnerability in

consumer nancial decision-making is of ever-increasing importance.

Recently, the FCA (2015)—the United Kingdom’s nancial regulation

body—has collated a list of risk factors characterizing nancial vulner-

ability, comprising a subset of risk factors previously identied by the

CFPB (2013)—the US government agency responsible for consumer pro-

tection in the nancial sector. Importantly, both the CFPB (2013) and its

United Kingdom’s counterpart—the Money Advice Service (2015)—have

stressed the importance of psychological factors in better understanding

issues of nancial capability. Although policy makers thus seem cognizant

of the relevance and importance of nancial vulnerability for consumer

nancial decision-making, and are interested in the associated individual

psychological characteristics, academic research in this specic area

remains scarce.

Consumer researchers do show an increasing interest in the area of con-

sumer nancial decision-making in general (Lynch 2011), and an emerging

stream of research identies how individual psychological characteristics

relate to positive and negativenancial outcomes. In this regard, regulatory

focus (Briley and Aaker 2006), time preference (Lynch and Zauberman

2006), propensity to plan for money (Lynch et al. 2010), PSO (Dholakia

et al. 2016), nancial self-efcacy (Lown 2011), money management skills

(Garðarsdóttir and Dittmar 2012), and individual differences in the consid-

eration of future consequences (Joireman, Sprott, and Spangenberg 2005)

are considered particularly relevant. Moreover, previous research supports

the relevance of the individual risk factors of nancial vulnerability as

identied by the FCA (2015) and the CFPB (2013), such as high-debt

levels (Wang 2010), being older or younger (Cui and Choudhury 2003;

Grifths and Harmon 2011; Moschis, Mosteller, and Fatt 2011), receiving