Editors' pick: Originally published Jan. 13.
Call it a matter of mind over money. Yes, a new study demonstrates that believing in yourself, believing in your ability to succeed, improves the odds of avoiding financial distress.
"Individuals who believe more strongly that they can change future outcomes though their actions, are less likely, years later, to be delinquent on loans, and to suffer consequences such as having assets repossessed or property foreclosed, or to lose access to traditional credit," wrote the authors of report recently published by the National Bureau of Economic Research.
What's more, the researchers, Camelia Kuhnen, an associate professor at the University of North Carolina's Kenan-Flagler Business School, and Brian Melzer, an assistant professor at Northwestern University's Kellogg School of Management, discovered that "those with higher self-efficacy prepare more to avoid financial distress later in life, and have a lower probability of being financially delinquent upon facing negative financial shocks induced by a job loss or a health event."
In their study, Kuhnen and Melzer investigated what they described as "a novel determinant of household financial delinquency, namely, people's subjective expectations regarding the cost-benefit trade-off in default decisions."
These expectations, wrote Kuhnen and Melzer, are determined by individuals' self-efficacy, which is a non-cognitive ability that measures how strongly people believe that their effort will influence future outcomes.
"Complementing prior findings regarding the effects of cognitive abilities, financial literacy and education on economic behavior, our evidence suggests that non-cognitive abilities have an important role in household financial decision making," wrote Kuhnen and Melzer.