|Depression and financial planning horizon
|Year of Publication
|Choung, Y, Chatterjee, S, Pak, T-Y
|Journal of Behavioral and Experimental Economics
|Clinical depression, financial planning horizon, Intertemporal choice, Major depressive episode, Myopic decision, Time preference
Major depression is associated with biased information processing and decision making. Previous research suggests that people dealing with depression view the future negatively and exhibit a higher discounting rate than healthy people do. This study tests the hypothesis that depression is associated with financial planning horizon–the time horizon by which individuals and households formulate their saving and spending schedules. Analyses conducted using data drawn from multiple waves of the Health and Retirement Study showed an inverse association between major depressive episodes and financial planning horizon, indicating that depressed people plan their finances over a shorter horizon. We also found that major depression is associated with various health and financial outcomes representing evidence of myopic decision making. The link between depression and financial planning horizon is partially explained by depression-oriented differences in behavioral traits, such as optimism/pessimism, perceived control, perceived mastery, and self-assessed survival probability. Overall, our findings point to a significant economic cost of depression, which compounds through myopic financial planning.