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Psychological characteristics and household savings behavior: The importance of accounting for latent heterogeneity

Gerhard, P; Gladstone, JJ; Hoffmann, AOI; (2018) Psychological characteristics and household savings behavior: The importance of accounting for latent heterogeneity. Journal of Economic Behavior and Organization , 148 pp. 66-82. 10.1016/j.jebo.2018.02.013. Green open access

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Abstract

We employ a finite mixture model with maximum likelihood (ML) estimation to analyze latent heterogeneity in the relationship between psychological characteristics and household savings behavior. In a one-step ML estimation approach, we estimate a class membership model and a behavioral model of the classes jointly. Adopting this approach enables us to simultaneously assess how socio-demographic characteristics affect class membership probabilities and estimate class-specific regression coefficients, to test whether psychological characteristics predict savings behavior differently across latent classes. We apply this approach to a representative sample of UK households (n = 3382) and identify two different latent classes: striving versus established households. We find that the relationship between psychological characteristics and savings behavior differs across these two classes, demonstrating the importance of accounting for latent heterogeneity when studying the drivers of savings behavior. Our results have implications for policymakers attempting to improve household savings behavior.

Type: Article
Title: Psychological characteristics and household savings behavior: The importance of accounting for latent heterogeneity
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.jebo.2018.02.013
Publisher version: https://doi.org/10.1016/j.jebo.2018.02.013
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: Consumer financial decision-making, Finite mixture model, Household finance, Latent class, Latent heterogeneity, Individual differences, Psychological characteristics, Savings behavior, Unobserved heterogeneity
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management
URI: https://discovery.ucl.ac.uk/id/eprint/10046595
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