Discipline, risk, and the endogeneity between financial decisionmaking and health

We examine the effect of financial asset allocation and asset liquidity on individuals’ health. Earlier literature finds empirical evidence and provides theoretical justification of the impact of health on financial decisions but speculates that reverse causality is unlikely. Through panel data methods and an instrumental variable approach, we refute this claim and establish a causal effect of financial choices on physical and mental health outcomes. Our findings suggest that accounting for endogeneity changes the results from a basic specification. Stock holdings no longer significantly affect health while ownership of time accounts and retirement accounts have a strong positive effect on health outcomes. An exploration of the channels driving these effects provides confidence that the potential stress caused by the risk level of financial assets as categorized by the literature is not the primary driver of health outcomes. However, the findings support the time preference channel, i.e. willingness to forego financial satisfactions today in return for greater financial well-being in the future causes beneficial physical and mental health outcomes. There is also some support for the allostatic load hypothesis as well as a dopamine substitutability hypothesis.