Financial vulnerability: What predicts changes over time?

An important question regarding financial vulnerability is not just what makes someone more or less vulnerable at a particular point in time, but also what makes them more or less likely to move between states of higher vs. lower financial vulnerability over time. We address this question by applying a Hidden Markov Model to assess how individual psychological characteristics predict membership of and transition between states of higher vs. lower financial vulnerability over time across a representative sample of U.S. individuals. We find that consumers in a state of higher vulnerability are “entrenched” in having a relatively low likelihood of moving to a state of lower vulnerability, while those in a state of lower vulnerability are “fragile” in having a relatively high likelihood of moving to a state of higher vulnerability. While financial self-efficacy is important to explain state membership, consideration of future consequences is key to understand state transitions.