Income Volatility Increases Financial Impatience

Colin  West; A.V.  Whillans; Sanford  DeVoe

Working Paper | HBS Working Paper Series | 2020

Income Volatility Increases Financial Impatience

by Colin West, A.V. Whillans and Sanford DeVoe

Abstract

Using a multi-method approach, we investigate whether income volatility is associated with financial impatience—the preference to receive a small sum of money immediately over a larger sum of money later. We find that experiencing more income volatility—including a higher frequency of either income dips or spikes – is associated with greater financial impatience. Using longitudinal data on biannual income, Study 1 demonstrates that this effect operates above and beyond individual differences in income risk preferences and wealth. Study 2 conceptually replicates these correlational findings with recent month-to-month income volatility and finds that this effect occurs primarily among people who report having little control over their finances. Using a longitudinal field experimental with low-income working women, Study 3 tests for a causal effect of an externally-induced spike in monthly income on changes in financial impatience. In a pre-post test experimental design, participants randomly assigned to receive cash transfers amounting to a median monthly income spike of 29% exhibit significantly greater financial impatience compared to a control condition in which participants receive no cash transfers. We conclude by discussing the implications of these findings for employers and policymakers.

Language: English

Format: Print

53 pages

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Citation:

West, Colin, A.V. Whillans, and Sanford DeVoe. "Income Volatility Increases Financial Impatience." Harvard Business School Working Paper, No. 21-053, October 2020.

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Income Volatility Increases Financial Impatience

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