Making sense of financial vulnerability: between sensitivity, resilience and exposure
Authors: Valentin Voith, Sandra Mauser
Year of publication: 2024
Economic uncertainty has increased globally, affecting households and individuals in their financial lives. Policymakers are confronted with the task of stemming the loss of prosperity and providing help to financially vulnerable people. Empirical research uses various approaches to conceptualize financial vulnerability. The assumptions used yield important implications for policy measures. In this paper, we develop a theoretical framework that offers a way to interpret and compare existing research on common ground. We understand financial vulnerability, which we define as the likelihood of experiencing financial hardship, as a three-dimensional model, namely a function of (1) sensitivity, i.e. objective factors outside an individual’s immediate sphere of influence, (2) resilience, i.e. subjective capacities to cope with and to adapt to financial shocks, and (3) exposure, i.e. the probability of encountering a financial shock. With this conceptualization, vulnerability due to structural social inequalities can be distinguished from vulnerability due to unsound financial decision-making. Our three-dimensional model therefore offers a clearer understanding of which policy measures are needed to support people in their financial lives. In this context, special emphasis is placed on the potential role of financial literacy. An empirical analysis using the Austrian dataset of the 2019 OECD/INFE survey of adult financial literacy is included to demonstrate the applicability of our theoretical framework.
The publication can be found here.