When mental health affects financial decisions

by Olga Goldfayn-Frank & Yuri Pettinicchi
Posted on August 08, 2019

At any point in time, at least 1 in 6 people in Europe are affected by mental health issues. They may be young, poor, ill – or not. According to the World Health Organization, everyone experiences a mental health problem at least once in their lifetime. This year at the World Economic Forum in Davos, economic and political leaders chose to talk about this. It was a clear and vocal recognition of both the enormous scale and the vast economic and social costs of mental health – putting it on par with climate change and trade wars.

While governments world-wide try to assess and manage the health care costs and productivity losses related to mental health problems, individuals and households face their own challenges. People affected by mental health issues (such as burn-out) are particularly vulnerable financially. Apart from potentially high medical bills and job income loss, mental health may affect the ability to cope with important daily issues, such as making financial decisions, paying bills on time or repaying credit card debts. This creates pressure from several sides on a household’s finances, with potentially lasting detrimental effects on financial well-being.

“Mental health affects households' financial situations above and beyond income or health-related expenditures”

Mental health: sick, sad and poor?

There is growing evidence that emotional distress affects financial well-being through both higher expenditures and lower earnings, as well as expectations (Cocco, Gomez and Lopes, 2017). At the same time, there is relatively little evidence on what happens to financial decisions of the household, if the decision-maker cannot adequately manage finances due to emotional and cognitive stress.

As a part of their seminal work linking psychology and economics, Xavier Gaibax and David Liabson propose that people who experience cognitive stress may find it difficult to make plans. We chose to document the effect of mental health on financial situations of households, above and beyond labour income or health-related expenditures.

Also, we wanted to provide evidence that mental health problems may have lasting impact on the household’s finances, through financial decisions, such as (lack of) retirement savings and investments. Finally, we decided to find out if the delegation of financial decision-making could alleviate the financial distress amongst individuals affected by mental health problems. Could delegating contribute to better financial decisions and outcomes for households?

First things first. What is mental health? It is defined as “a state of wellbeing in which the individual realizes his or her own abilities, can cope with the normal stresses of life, can work productively and fruitfully, and is able to make a contribution to his or her community” (WHO report, 2019). Several aspects of mental health have been linked to economic performance:

  • Physical aspects of mental health: sleep deprivation, fatigue, lack of concentration;
  • Emotional exhaustion: being on edge or depressed, feeling down or worn out;
  • Social functioning: feeling lonely or left out.

Emotional exhaustion and lack of concentration in particular have been linked to work performance, as well as one’s ability to make sound decisions. If people feel they lack strength or/and time to manage their daily affairs, they are much less likely to manage their financial affairs well. Social functioning, on the other hand, has been linked to people’s ability to communicate and could be seen as a channel to receive information and support.

Finally, mental health has been linked to cognitive abilities, especially to memory and concentration. It has been shown that memory and concentration in particular are associated with taking better financial responsibility and better financial decisions overall.

“There is little evidence that the link between mental health and financial distress depends on income or wealth.”

Preliminary results

To answer our research questions, we use several datasets. The first evidence comes from SHARE, the European longitudinal survey of elder households (50+), which covers 27 European countries and Israel between 2004-2017. People were asked if they “find it difficult to have ends meet” at the end of the month, whether they had delayed payments of their most essential bills (housing costs), as well as record of financial liabilities. Importantly, these are the people who are either retired or close to their retirement age, and are therefore less dependent on their labour income, while their accumulated pension wealth becomes more important.

We expand our analysis using the British household survey “Understanding Society”, which contains detailed information about a representative population of the UK, including data on mental health, cognitive abilities, economic situation and financial well-being.

We find that mental health is strongly and negatively associated with both self-reported financial distress and being in debt. The effect of mental health on being in a precarious financial situation is comparable or larger than being unemployed, even taking into account the differences in income and wealth levels as well as education and physical health. Mental health appears to be related more strongly to financial distress for men and younger people. Somewhat counter-intuitive, there is little evidence that the link between mental health and financial distress depends on income or wealth.

“Increasing people's intrinsic motivation could be the key to better financial decisions”

A possible solution: intrinsic motivation and support

Given the prevalence of mental health problems, it is important to understand what could improve financial outcomes for households in this difficult situation. Firstly, it appears that financial decision-makers faced with mental health problems are more likely to delegate financial responsibilities. Secondly, there is a particularly strong association between emotional exhaustion (being depressed, feeling powerless and worn out) and poor financial performance.

This is consistent with the psychological phenomenon of low self-efficacy. Self-efficacy is a personal belief in one’s own ability to perform well, and exercise control over outcomes. People with low self-efficacy are less likely to act, or less likely to act to the best of their ability – simply because they do not believe that their effort will produce the desired results. Not coincidentally, one of the approaches to treat depressed people is based on increasing their intrinsic motivation.

It could be helpful, therefore, to provide people’s motivation for better financial decisions. This could be the affirmative and supportive style of communication, highlighting the positive financial results (“You are on track to fulfilling your saving goals!”) or demonstrating the performance relative to one’s peer group (“Your investments performed as well as TexDax”). At the same time, commitment devices, such as automated monthly savings, would reduce the risk of “giving up”.

At the same time, a financial tool – which could lower the time and effort spent on managing finances and choosing financial allocations – could bring important benefits. Think of an automated payment of debt and arrears accounts, as well as allocation of saving and investments with “opt-out” rather than “opt-in” options.


Making financial decisions can be tough. It is even tougher when one suffers from emotional or cognitive stress. What are the financial risks in case of mental health problems – and how to deal with them?

These are important questions for some of the most vulnerable populations. Younger people, facing challenges of social performance stress and burn-out syndrome, could be exposed to labour income loss as a result. Additionally, sub-optimal financial decisions made early in life can have a detrimental effect on financial well-being later on.

The aging population, on the other hand, is shielded from labour-income volatility to a bigger extent, but depends increasingly on its accumulated wealth and income it generates. Therefore, financial mistakes can have incalculable consequences.

Cocco, Gomez and Lopes (2017) write about a vicious circle: financial distress influences mental health, which in turn leads to financial distress. In our research, we aim to show that while mental health problems may lead to financial distress, this vicious circle could be broken by providing adequate motivation and support.

Olga Goldfayn-Frank is a PhD student at Goethe University Frankfurt and Yuri Pettinicchi is senior researcher at the Max Planck Institute for Social Law and Social Policy.

Disclaimer: Olga Goldfayn-Frank is currently employed at the German Bundesbank. All views expressed in the article are those of the authors and do not represent the views of German Bundesbank or the Eurosystem


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