Three essay on risk and financial satisfaction

Risk surrounds every aspect of our financial lives. Our investments may produce any of a range of possible returns. The price of our home may rise a great deal, or it may fall. We may die unexpectedly early. We may die unexpectedly late. Our income may be stable and consistent, it may be terminated abruptly, or it may rise suddenly. How we assess, manage, and react to risks such as these may have a dramatic effect on our ability to derive satisfaction from our finances. In the first chapter of this dissertation, I examine the reaction of investors and non-investors to the volatility of the financial markets in the 2008 recession. I find that investors with medium or high levels of measured risk tolerance had significantly less financial satisfaction in 2008 than those of the lowest risk tolerance. This is likely due to the extreme volatility and large losses experienced by the market as a whole in 2008. This suggests that investors prioritize short-term volatility over long-term gains when assessing their satisfaction.
The second chapter of this dissertation examines how the general public reacts to volatility in the stock market. Using daily well-being data from the American Time Use Survey, I perform a Granger causality analysis to estimate that the general public does not begin to react to changes in the stock market until 30-100 days after the market movement occurs. This finding can help to explain a number of investor behaviors, including the tendency to mistime the market, and the disposition effect. The third chapter explores the reaction to credit card risk. I find that risk tolerance does help mitigate the dissatisfaction that comes from mismanagement of credit cards. This suggests that more risk tolerant households who mismanage their credit cards are more satisfied that less risk tolerant households who use their cards in a similar manner. I also find evidence that the monetary costs may not be the primary driver of the dissatisfaction associated with credit card mismanagement.