A Multi-Dimensional View of Financial Distress

A Multi-Dimensional View of Financial Distress

Bilgehan Kübilay
Copyright: © 2023 |Pages: 23
DOI: 10.4018/978-1-6684-5181-6.ch006
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Financial distress is a multidimensional and complex subject. Financial distress has physical and physiological effects and harmful consequences for individuals and families, ranging from unpaid debts and deteriorating health to suicide. For this reason, it has been a widely researched subject by different branches of science such as finance, psychology, and sociology. In this study, financial distress was examined from a subjective point of view. The effect of financial distress on physical and psychological health, its effect on families and children, and the effect of social support and socio-economic status on financial distress were investigated. The role of financial capability and financial resilience in reducing financial distress was emphasized. This study aimes to consolidate and expand knowledge about financial distress. The issue of financial distress has been extensively researched under the behavioral finance framework.
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Stress is an unpleasant feeling experienced when something valuable is lost or when the person feels threatened. This loss or threat can be financial (for example, loss of home), social (for example, the breakup of a relationship), symbolic (for example, loss of status), economic (for example, job insecurity). People experience stress when they believe they don't have the coping skills or resources needed to face perceived threat or loss. Factors that cause stress are called stressors. This stressor can be something that comes from the outside world (economic recession, layoff) or inner world and cannot be observed by the outside world (like fear of failure). Stressors can be acute or chronic, predictable or unpredictable, controllable or uncontrollable (Davis & Mantler, 2004, p. 3). It can be assumed that stress from one or more stressors is not just an emotion, but also a physiological response (Heo, et al., 2020, p. 3).

People are happier when they are healthy, are married or in a committed relationship, have a job, work, and feel financially secure (Xio & Garman, 2005, p. 73). An important part of general psychological well-being is contentment in various areas of life. One of these areas is related to the financial situation of the person. The terms used to name constructs that describe one's feelings about one's financial situation vary. In the literature, while positive expressions such as financial well-being, financial wellness, financial satisfaction, financial resilience, financial health, perceived income adequacy are used to describe the financial situation of the person, negative expressions such as financial distress, financial stress, financial strain, debt stress, economic distress and economic strain are also used. In the literature, either objective or subjective measures are used to describe the financial status of individuals. Objective and subjective measures evaluate different aspects of a person's financial situation and provide different sources of information. There is no consensus on which is the best measure. Both measures are useful for providing information about the financial situation of individuals. The ease of access to objective measurements also makes it easy to measure numbers, assuming accurate and appropriate data are provided. But it can be said that knowing one's feelings and judgments about one's financial situation will be more helpful. Because, while objective evaluations express verifiable, calculable, fact-based items (such as total savings, household income); it does not measure the depth of one's feelings and reactions to one's financial situation. Differences in perception, cognition and experience are included in subjective evaluations. Thus, subjective measure provides a richness that objective measure cannot provide. Because it helps to examine not only how people perceive their financial situation, but also how it affects individuals and families, physical and psychological health (Wuth & Cismaru, 2021, pp. 1-3; Prawitz et al., 2006, pp. 34-35). On the other hand, there is not always a strong link between economic hardship and financial (di)stress. People without financial difficulties may also feel financial (di) stress, or some with financial difficulties may not experience as much financial distress (Davis and Mantler, 2004, p. 23).

Due to its impact on individuals and society, financial distress has been a widely researched topic by different disciplines such as finance, psychology, sociology, marketing with different terms and different meanings. Although approached in different fields, some of these terms are similar, have overlapping aspects but not the same. When referring to negative financial health behaviors in the literature, it is seen that subjective measures are used more frequently than objective measures. According to the literature review, the terms economic hardship, financial distress, financial strain and economic deprivation are the most common negative financial terms in the databases, respectively (Wuth & Cismaru, 2021, p. 1-2).

Key Terms in this Chapter

Financial Capability: It refers to a set of skills and behaviors related to one's knowledge of financial matters, managing one's financial situation (such as spending habits, financial planning for the future, the ability to choose appropriate financial products) and controlling it.

Financial Health: It refers to a situation in which a person can evaluate and manage her/his financial situation and relationship with money in a psychologically healthy way and obtain healthy results in financial terms (such as income increasing, loss prevention).

Mental Health: It is the state of well-being related to the cognitive, emotional, and social well-being of how people think, feel and act in all aspects of their lives, from childhood and adolescence to adulthood. It is related to how people deal with stress.

Financial Hardship: It refers to the situation that a person faces due to individual or economic conditions such as unemployment, poverty, insufficient income, economic crises, economic recession, foreclosure, bankruptcy, excessive debt.

Social Support: It refers to having a social environment (spouse, family, relatives, friends, etc.) where one can seek help and support in the face of financial difficulties, and a person's security area.

Financial Resilience: People's readiness for unexpected financial difficulties and financial stress refers to their ability and capacity to cope with these difficulties.

Behavioral Finance: Behavioral finance is an interdisciplinary field that tries to explain people's behavior in decision-making processes with psychology, sociology, and anthropology factors along with finance.

Subjective Financial Distress: Subjective financial stress refers to a person's subjective feelings, judgments, and reactions to their financial situation. It includes assessments of how financial stress affects the person, one's family, social environment, physical and mental health.

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