Loss of Income Due to Coronavirus Pandemic: Risk-Taking Plunges
Research
Individuals who have experienced severe financial losses due to the coronavirus pandemic are significantly less willing to take risks. This particularly appears to be the case for households with a low income. On the contrary, other personality traits, such as patience and locus of control, remain unchanged following financial losses. These are the findings of a recent study by RWI – Leibniz Institute for Economic Research and ZEW Mannheim.
“Risk-taking has significantly decreased amongst households which have suffered from severe financial losses,” explains ZEW researcher Daniel Osberghaus. The correlation is particularly strong amongst households with low incomes and fewer sources of income. For example, households with a sole breadwinner show a stronger response than households with two earners. “We assume that the decline in risk-taking is due to the financial losses in the crisis and the uncertainty that comes with it,” says RWI researcher Manuel Frondel. However, it cannot be ruled out that risk-taking and financial losses are also influenced by other factors which have not been taken into consideration as part of the study.
Patience and locus of control remain constant
Approximately half of all German households incurred financial losses brought about by the coronavirus pandemic and the subsequent lockdown measures. These were the findings of a survey by RWI and ZEW Mannheim in early summer 2020. In fact, eight per cent of households even assessed their losses as being severe. Whilst experience of losses impacts negatively on an individual’s willingness to take risks, other psychological personality traits appear to remain constant, as a team of researchers from RWI and ZEW has found. According to this team, patience and the belief that something has happened as a consequence of one’s own behaviour – the so-called ‘internal locus of control’ – did not change as a result of economic losses brought on by the coronavirus crisis. “The findings suggest that the measured variables for patience and internal locus of control remain constant when external shocks occur,” explains ZEW researcher Osberghaus.
For their longitudinal study, the researchers from RWI and ZEW Mannheim used data provided by the Socio-Ecological Panel from the years 2012, 2014, 2015, and 2020. Approximately 5,500 individuals took part in the surveys. Based on this data, the researchers were able to find a statistical correlation between financial loss and changes in personality traits. This was made possible by using the ‘difference in differences’ (DID) estimation method, which involves comparing the time trends of the heads of households that have incurred financial losses and the time trends of unaffected heads of households.