| Abstract | Individuals are susceptible to financial uncertainty across the financial life cycle.
The financial life cycle consists of three stages, which are (a) borrow to build human
capital (b) accumulate wealth during the working life, and (c) distribute the accumulated
wealth to fund retirement. Individuals maximize utility by smoothing consumption utility
over the life cycle while managing uncertainty events. Such life cycle events are (a) the
untimely loss of human capital, (b) longevity risk (risk of outliving one’s savings), and
(c) the potential need for long-term care support and services (the severe financial loss
due to the high costs of formal LTCSS). Pre-cautionary savings are transferred from low
marginal utility periods to high marginal utility periods, which is accomplished through
the exchange of low-cost insurance premiums for the coverage of high cost uncertainty
events.
Despite the theoretical need for uncertainty protection, consumer demand for
insurance that mitigates or eliminates risk exposure to uncertainty events is historically
low. This conundrum is commonly referred to as uncertainty “puzzles.” The empirical
and descriptive literature examines many potential factors for these protection gaps that
range from financial, health, social insurance, substitute and complimentary assets, sociodemographic factors, and individual preferences, which this current paper controls for a
majority.
Researchers suggest that further analysis beyond economic and social factors is
necessary to investigate the potential behavioral and psychosocial factors that could
partially explain the uncertainty puzzles. Research is growing yet limited when
considering individuals personality traits as potential explanations for personal finance
behaviors. This study investigates and provides results that suggests that, after controlling
for factors mentioned in the previous literature, personality traits could partially explain
the low demand for financial uncertainty insurance.
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