Locus of Control on Financial Behavior and Financial Risk Attitude

This paper investigates the impact of locus of control on financial behavior and financial risk attitude. Financial behaviors are captured by savings, payment behavior, and investment, while financial risk attitude is measured by the level of willingness to take financial risks. Using the longitudinal data of Household Income and Labor Dynamics in Australia (HILDA), where locus of control is measured across many waves, we compute the between to within ratios to examine the variations in the locus of control over time. The values of between to within ratios suggest that locus of control is a rarely changing variable, and therefore the fixed-effects vector decomposition model is preferable for our empirical analysis. Our findings reveal that locus of control significantly affects financial behavior and financial risk attitude. Particularly, individuals with an internal locus of control are likely to save more, invest more, be more willing to take financial risks, and have less overdue payments. Moreover, we find that more internal locus of control leads to (1) higher savings and more on-time debt payments for females, (2) lower willingness to take financial risks for older individuals, and (3) higher willingness to take financial risks for higher educated individuals. Our findings are confirmed when we control attrition bias and re-estimate the model using the Partial Random Effects Mundalk (REMT) Transformation.