Published: April 8, 2019


Download: Life Course Centre Working Paper: 2019-06

Authors:

Deborah A. Cobb-Clark, Sarah C. Dahmann, and Nathan Kettlewell.


Non-Technical Summary:

Depression affects the way that people process information and make decisions, including those involving risk and uncertainty. Our objective is to analyze the way that depressive episodes shape risk preferences and risk-taking behaviors. We explore this using large-scale, representative panel data from German households.

We first analyze whether risk preferences (people’s proclivity towards taking risks) differs between the depressive and the non-depressive (‘mentally-well’). We identify people at risk of a depressive episode using a screening threshold related to a widely used self-completion questionnaire that measures mental wellbeing. We find that on a behavioral risk preference task involving choices between different lotteries, there is no difference between the depressive and mentally-well. However, on stated risk attitude questions (i.e. willingness to take risks in general and in specific contexts), these two groups do differ, even after controlling for observable differences in characteristics like gender, education and income. These differences are context-specific. Those who are likely to be experiencing a depressive episode report less willingness to take risks in general, but more willingness to take health risks, for example.

We next investigate whether there are context-specific differences in the tendency to engage in risky behaviors including financial risk-taking (i.e. purchasing risky assets and insurance), health risk-taking (i.e. smoking, poor diet, and sedentary lifestyle) and social risk-taking (i.e. lending money or belongings to friends). Consistent with our stated risk attitude results, we find that those at risk of experiencing a depressive episode are more willing to take risks with regards to their health than those who are not currently at risk. However, results are mixed for financial and social risk-taking.

Our final step is to explore why risk-taking behavior of the depressive and mentally-well differs. We do so by conducting a mediation analysis on the risk-taking gaps between these groups. This essentially involves controlling for observable differences between the two groups and examining how the estimated risk-taking ‘gap’ changes. It is important to note that analysis of this kind is suggestive of the likely pathways between depression and risky behavior, but is not causal. We find that differences in risk-taking behavior are largely explained by depression-related disparities in behavioral traits such as locus of control, optimism and trust. Whereas, differences in risk preferences per se appear to play only a minor role in explaining depression-related differences in risk-taking behavior.

These conclusions have important implications for public health efforts to address the challenges posed by poor mental health. Although our analysis is not causal, we have identified several behavioral tendencies that may be helpful in screening for depression. Our results open up interesting directions for the design of interventions targeting less desirable risk-taking behavior. Those experiencing depression, for example, may fail to realize the additional financial returns associated with purchasing high growth assets, while at the same time exposing themselves to downside risk by insuring less. Any financial costs of not insuring are likely to be compounded by the additional health risks they take. These financial penalties might be mitigated through interventions targeting financial literacy for those experiencing, or at risk of experiencing, depression.

Published

April 8, 2019