Financial Services Review

The Impact of the COVID-19 Income Shock on Debt Management: A Mediation Analysis

Congrong Ouyang — 2025-02-28

This study uses the 2021 wave of the FINRA National Financial Capability Study dataset to examine the association between large and unexpected income drops experienced by individuals during the COVID-19 pandemic and an individual’s use of stimulus checks to settle debt obligations. This study also examines the mediating role of individuals’ perceived lack of financial control in the association between the large drop in income and the use of stimulus checks for debt payments. The results reveal that over one-third of households allocated their stimulus checks towards debt payments. Notably, individuals experiencing a large and unexpected drop in income had 5.5% higher odds of using pandemic stimulus checks for debt management. Moreover, this relationship was significantly mediated by an individual’s perceived lack of financial control. The findings from this study shed light on the complex associations between experiencing an unexpected and large income reduction, perception of financial control, and debt management decisions of individuals. The significant role of perceived financial control in describing individuals’ debt management decisions found in this study suggests that perceived control is not just a reflection of a household’s financial situation but also a determinant of their financial decision-making in times of crisis. Furthermore, the results underscore the critical role of stimulus checks and other financial assistance in mitigating the economic impacts of the pandemic on American households. Findings from this study contribute to a deeper understanding of financial decision-making processes during periods of economic uncertainty and offer implications for future economic policies and financial literacy programs.

Retirement Expectations vs. Reality: If COVID-19 Did Not Impact Retirement Expectations Significantly, What Did?

Zhikun Liu — 2025-02-28

Using two data sets (a Prudential Financial Wellness Survey and the Health and Retirement Study), this study demonstrates that although there is generally a natural upward trend for older (age 50+) Americans to progressively delay their expected retirement age, this trend has no statistically significant relationship with the COVID-19 pandemic. The distribution of older Americans’ expected retirement ages is bimodal, often centered around two Social Security Benefit claiming ages – the early retirement age and full retirement age. However, actual retirement ages are more likely to follow a left-skewed distribution, whereby people appear to retire earlier than expected. The most significant factors that influence participants’ retirement decisions relative to expectations are health (+), wealth (-), age (+), change of marital status (+), mortality expectations (+), education levels (+), disability (-), and major illness diagnosis (-). Focusing on these factors can help the retirement benefits community explore strategies to mitigate the negative consequences of gaps between retirement expectations and reality.

* “(-)” means the impact is negative, i.e., retire earlier than expected, and “(+)” means the impact is positive.

Protecting Well-Being through Financial Shocks

Emily Koochel — 2025-02-28

The ability to provide more than problem-solving interventions is useful in reducing client stress. Protective features can be built and amplified during financial uncertainty that may increase individuals’ resilience against factors that have the potential to cause damage to their financial well-being. To understand the predictive relationship between financial stressors, prior financial experience and exposure, and resources impact on financial well-being, a three-model hierarchical multiple regression was conducted with financial well-being as the dependent variable. Greater availability of resources increased financial well-being above and beyond the effects of stressors and prior exposure and experience. However, it is important to note that greater availability of resources was not measured just by income, rather it was variables that assessed other forms of capital. Specifically, individual qualities such as self-control and perceived health positively contributed to financial well-being. Results indicate that maintaining financial well-being is about more than knowledge and skill. Increasing opportunities for financial socialization and building clients’ sense of control may serve as a key buffer during times of financial stress.

Resilient Personality or Financial Resilience Framework for Coping with Physical and Mental Health During the COVID-19 Pandemic

Megan McCoy — 2025-02-28

Crises events such as the COVID-19 pandemic can have a profound impact on consumers’ financial, physical, and mental health. This study explores the role of two resilience frameworks, namely the financial resilience framework and the resilient personality, in coping with physical and mental health challenges during the pandemic. The financial resilience framework encompasses economic resources, access to financial resources, financial knowledge and behavior, and social capital, while the resilient personality focuses on cognitive flexibility and the ability to tolerate ambiguity. The study aims to investigate whether these frameworks act as complements or substitutes in promoting resilience. GLM ANOVA is employed in this research to examine the effects of financial resilience and a resilient personality on physical and mental health outcomes. Findings from this study indicate that both the financial resilience framework and resilient personality may contribute to one’s mental and physical health. However, the financial resilience framework is a stronger predictor of a positive self-assessment for both health factors than a resilient personality.

An Investigation of the Relationship between Gender and Investor Behavior During the 2022 Market Meltdown

matthew sommer — 2025-02-28

This study used primary data collected during October 2022 from 2,119 U.S. retail investors to investigate how individuals were coping with the declining stock market and rising inflation. Using a path analysis, this study sought to explain the relationships between gender, financial stress, investment overconfidence, and trading behavior. First, a positive relationship was found between males and moving from stocks and bonds to cash. Next, the results indicated that females were more likely to have experienced financial stress and males were more likely to have displayed investment overconfidence. Both financial stress and investment overconfidence were positively related to moving from stocks and bonds to cash. The indirect effects of financial stress and investment overconfidence, however, were small and only partially mediated the relationship between gender and trading behavior.

Retail Investors and Investment Fraud Victims: Is There a Connection?

Christopher Rand — 2025-02-28

This study analyzed specific characteristics of investment fraud victims. Logistic regressions on a national sample of retail investors revealed that overconfident and financially literate investors shared several characteristics with victims of investment fraud. While overconfident investors were the most comfortable with market regulation and making investment decisions that assumed high amounts of risk relative to investment returns, financially literate investors surpassed them in the frequency of annual trading and portfolio allocation to stocks. Surprisingly, overconfident investors favored due diligence via background checks on investment professionals, while financially literate investors did not. Overall, males and younger investors tended to share characteristics with investment fraud victims.

Crypto Investment: The Role of Investment Motivations, Investment Confidence, and Risk Perceptions

Yu Zhang — 2025-02-28

In an era of increasing interest in cryptocurrency, this research delves into the psychological and behavioral factors influencing cryptocurrency investment and future cryptocurrency investment intentions. Analyzing data from the 2021 National Financial Capability Study and the Investor Survey, the study employs two logistic regression models to investigate the effects of investment motivations, risk perceptions, and investing confidence on cryptocurrency investments in a sample of 1,653 American investors. The findings revealed that motivations and investment confidence positively correlate to the choice to engage in cryptocurrency investments and the propensity for future investments. The risk perception of cryptocurrencies acts as a barrier, discouraging current investment behavior and future investment intentions in this class of assets. The integration of psychological factors into the examination of cryptocurrency investment has two important implications: 1) it enhances the accuracy of investor profiling, and 2) it heightens the awareness of motivational factors, enabling financial advisors and planners to provide personalized guidance that addresses the cognitive and emotional motivations associated with investing in a market as volatile as cryptocurrency.

Assessing the Impact of Rebalancing on Equal-weighted and Value-weighted Portfolios over Five Decades

Rama Malladi — 2025-02-28

This study investigates the impact of transaction costs on the performance differential between equal-weighted portfolios (EWPs) and value-weighted portfolios (VWPs). Employing a comprehensive dataset of 181 stocks from 1970 to 2023, we utilize paired two-sample tests to identify statistically significant differences in turnover and risk-adjusted returns. Our findings reveal a substantial performance advantage for EWPs, with annualized return surpluses ranging from 115 to 188 basis points over VWPs, depending on the assumed transaction cost level. Notably, this outperformance persists until transaction costs reach a critical threshold of 728 basis points of portfolio turnover. The analysis further demonstrates that EWPs outperform VWPs in 94.5% of scenarios devoid of transaction costs, declining to 84% when incorporating realistic cost assumptions. These results highlight the potential of EWPs to exploit diversification benefits but also emphasize the crucial role of transaction costs in moderating their outperformance.

A Domain Specific Measure of Investment Risk Preference

Eun Jin Kwak — 2025-02-28

This study introduces and validates a domain-specific investment risk-preference measure that integrates elements of revealed-preference tests, using choice scenario dyads, with stated-preference approaches that leverage individual experiences and perceptions. Data from two surveys were analyzed using OLS regression and ordered logit models to evaluate the measure’s efficacy. Results demonstrate that the proposed measure is positively associated with a modified version of the Survey of Consumer Finances (SCF) self-assessed risk-tolerance item and negatively associated with cash-holding behavior. Compared to existing risk-tolerance assessments, this measure offers a practical advantage by allowing financial advisors to align investment products more accurately with a test-taker’s risk-taking comfort level. This direct applicability highlights the measure's unique value in enhancing portfolio personalization and advancing the precision of investment risk assessment tools.

Does Overspending Harm Retirement Preparation?

Christina Lynn — 2025-02-28

This study addressed the research question of how overspending is related to retirement preparation. A commonsense answer to this question is this: overspending should negatively impact retirement preparation. However, the existing body of knowledge does not provide evidence to support or deny this assumption. The Behavioral Life Cycle Hypothesis was tested as a theoretical framework to answer this research question, providing valuable insight. Three data sets were used, including the Survey of Household Economic Decisionmaking (SHED), the Survey of Consumer Sciences (SCF), and the National Financial Capability Study (NFCS), to conduct logit and OLS regressions in testing the hypotheses. Because the overspending measurements were only negatively related to retirement preparation in a little over half the analyses, the results point to a new cultural norm where one’s overspending behavior does not necessarily reflect one’s retirement preparation behavior. Results provide support for policy actions related to tightening credit card policies, exposing a lack of awareness on overspending, providing practical approaches for avoiding overspending behavior, and the value of using multiple data sets as a robustness check.

Financial Services Review Masthead

John Grable — 2025-02-28

From the Editor

John Grable — 2025-02-28