Personality traits and financial risks among older Americans: Living too long, dying too early, and living too sick



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Individuals are susceptible to financial uncertainty across the financial life cycle. The financial life cycle consists of three stages, which are (a) borrow to build human capital (b) accumulate wealth during the working life, and (c) distribute the accumulated wealth to fund retirement. Individuals maximize utility by smoothing consumption utility over the life cycle while managing uncertainty events. Such life cycle events are (a) the untimely loss of human capital, (b) longevity risk (risk of outliving one’s savings), and (c) the potential need for long-term care support and services (the severe financial loss due to the high costs of formal LTCSS). Pre-cautionary savings are transferred from low marginal utility periods to high marginal utility periods, which is accomplished through the exchange of low-cost insurance premiums for the coverage of high cost uncertainty events. Despite the theoretical need for uncertainty protection, consumer demand for insurance that mitigates or eliminates risk exposure to uncertainty events is historically low. This conundrum is commonly referred to as uncertainty “puzzles.” The empirical and descriptive literature examines many potential factors for these protection gaps that range from financial, health, social insurance, substitute and complimentary assets, socio-demographic factors, and individual preferences, which this current paper controls for a majority. Researchers suggest that further analysis beyond economic and social factors is necessary to investigate the potential behavioral and psychosocial factors that could partially explain the uncertainty puzzles. Research is growing yet limited when considering individuals personality traits as potential explanations for personal finance behaviors. This study investigates and provides results that suggests that, after controlling for factors mentioned in the previous literature, personality traits could partially explain the low demand for financial uncertainty insurance.



Personality traits, Life insurance, Annuity, Long-term care, Human capital, Longevity risk, Chronic illness, Five factor model, Consumer demand theory, Life cycle theory, Big five