Lay actions in the face of crisis—Swedish citizens’ actions in response to the global financial crisis of 2008

The Journal of Socio-Economics 41 (2012) 796–805

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Lay actions in the face of crisis—Swedish citizens’ actions in response to the global financial crisis of 2008 Inga-Lill Söderberg a,∗ , Misse Wester b,1 a b

Centre for Banking and Finance, Royal Institute of Technology, KTH, Brinellv 1, 100 44, Sweden Department of Philosophy and History of Technology, Royal Institute of Technology, KTH, Teknikringen 72, 100 44, Sweden

a r t i c l e

i n f o

Article history: Received 3 July 2011 Received in revised form 8 August 2012 Accepted 23 August 2012 JEL classification: D1 D81 G01 H31 Keywords: Financial crisis Risk perception Laypeople Action Logistic regression

a b s t r a c t This study goes beyond attitudes and behavioral indications as response to risk perceptions and focuses on actual behavior of laypeople. We report the results from a survey, conducted among a sample of Swedish citizens in the spring of 2009, looking at lay actions as responses to the financial crisis of 2008. In total, 3138 respondents were asked whether they had done something to protect their money during the recent financial crisis or not. The total sample, 1053 respondents, was divided into two comparable groups and a binary logistic regression tested a model with nine factors hypothesized to be predicting the choice to act or not as a response to the financial crisis. Among the eight factors predicting likelihood to act were gender, age, education, ethnicity, possession of assets affected of the financial crisis, worrying about the everyday household finances, the perception of others’ actions, and importance put on being knowledgeable and up-dated about financial matters. The ninth factor—respondents’ perception of the crisis to be a greater threat to the U.S. and global economy than to their own personal finances—did not contribute significantly to the model. A second aim of the study was to determine whether any individuals acted rashly and, if so, whether this group differed in any statistically significant way from the group of individuals that acted in a more financially circumspectly manner. In the group of individuals that acted rashly there is a higher propensity of: individuals who do not think they have assets affected by the crisis: individuals who have a lower level of education; and individuals who consider it important to be knowledgeable and up-to-date about financial matters. It should be of interest to policymakers and researchers to further explore features of this group of laypeople because it is the most important target group for consumer information and protection. © 2012 Elsevier Inc. All rights reserved.

1. Introduction When the financial crisis erupted in 2008, the eyes of the world were focused on the actions (or inactions) of large actors in the financial market, such as Lehman Brothers, the North American housing market, the banking system in Iceland, and Russian industry. Large financial actors in various countries made decisions that affected citizens in their most private sphere and had great consequences for ordinary people. The effects were felt in the global financial market, and a scenario of crisis and chaos was communicated not only by media worldwide but also by authorities. The reasons for this crisis and its effects have been well covered since the collapse of the subprime system in the United States (Rötheli, 2010; Lewis, 2010; Crotty, 2009). However, the following questions

∗ Corresponding author. Tel.: +46 87907406; fax: +46 84117436. E-mail addresses: [email protected] (I.-L. Söderberg), [email protected] (M. Wester). 1 Tel.: +46 87909567. 1053-5357/$ – see front matter © 2012 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.socec.2012.08.007

have not yet been extensively explored in the literature: How did ordinary citizens act in response to the threats of the financial crisis? Are there mechanisms in existence that are similar to those in other types of large-scale crises? Beck (1992) claims that people live in a risk society. What is specific to the modern risk society is that ordinary citizens are faced with risks that are produced as a direct result of modern technology and that these risks often elude their senses. This means that the risks that people face today—such as climate change, possible harm from food additives, and exposure to radiation—cannot be detected until it is too late. In the present study, we argue that financial risks are of the same kind to ordinary citizens because the fluctuations and cumulative effects of different financial markets are out of the hands of laypeople. According to Beck’s (1992) reasoning, risks become known after an adverse effect has already been identified, for example, when individuals become ill from eating contaminated food or when the negative effects of dangerous chemicals that have been released are observed in nature. In other words, risks in some cases have already developed into crises before being detected. This means, in terms of individual risk management, that ordinary

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citizens need to rely on the knowledge and advice of experts. The similarities of financial crises are obvious: Experts construct the financial instruments that cause crises and make all major decisions concerning the regulations needed to hinder future crises, and laypeople invest their savings or borrow money at the recommendation of expert advisors and rely on experts to govern the financial system. The possibilities for laypeople to predict financial crises and protect themselves against them are small. The understanding of this phenomenon lays the foundation for regulations concerning consumer protection and policymakers. In financial literature, risk is depicted as a two-sided coin, entailing both a threat to one’s existing assets and an opportunity to act so as to gain more financial assets. Because this study focuses on actions taken by laypeople in reaction to perceived threats connected with a large international financial crisis, risk is here studied in the sense of a threat to the individual, as in the case with other major crises. Therefore, risk psychology and findings from research on international crises like natural disasters, contagious diseases and risks caused by technological disasters are used. The global magnitude of the financial crisis of 2008 and the rapid media communication of the expected effects on all layers of society are the main reasons for this positioning. This study goes beyond attitudes and behavioral indications as response to risk perceptions and focuses on actual behavior of laypeople. A majority of studies that aim to clarify the relationship between risk perception and behavior have focused areas such as health-related behavior, safety behavior and behavior in relation to environmental risk. For example, studies in risk perception and traffic behavior indicate that women have a higher risk perception than men, resulting in a safer driving style (Wester, 2012). Other studies that examine the link between perception of environmental risk and pro-environmental behavior suggest that the link between behavior and attitudes are weak (Mainier et al., 1997; Cottrell, 2003). For example, when environmental risks are recognized, a positive attitude toward the environment does not always translate into environmentally friendly behavior (Pe’er et al., 2007). Other factors, such as behavioral options, must be considered. We explore the extent to which risk psychology is applicable to the understanding of laypeople’s actions in situations associated with a large financial crisis. Because the recent financial crisis will probably not be the last, our findings should be of interest to risk researchers and should help stimulate further financial studies. We begin our research by asking the following question: How do people act when a large financial crisis is communicated on a massive scale by authorities and through media? We argue that this situation is consistently different from everyday decisions about investments involving financial risks and that it should therefore be studied as such, with the help of existing theory of risk psychology and experiences from studies of other large-scale international crises. The purpose of the present study is to test empirically if financial crises evoke mechanisms similar to those in other types of unpredictable, large-scale crises involving laypeople. To fulfill this purpose, we conducted a randomized empirical study of what Swedish laypeople did when the financial crisis struck in 2008. The present study asks the following two questions: • What influenced the decision by laypeople to take action or not to take action in response to the financial crisis of 2008? • Did laypeople act rashly in response to the financial crisis of 2008, and if so, what features characterized those who did so? The main interests of this paper are the actions of laypeople and the perceptions that led to these actions. People live their everyday lives with different risks surrounding them. Some of these risks give rise to crises of large magnitude. A crisis is here defined as something that places fundamental and commonly owned values

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in society at risk and that triggers the questioning of power relationships (Nohrstedt, 2000). This article is structured as follows: a brief literature review and a presentation of a model to be tested follow this introduction. The context of the study—that is, the financial crisis and the actions of Swedish consumers in 2008—is then presented, followed by a section on data and methods used. Results are provided, and an analysis of the findings and a discussion of their implications for theory and practice conclude the paper.

2. Literature review and hypotheses As the field of risk research is large this section is divided into two sections to illustrate the main theoretical frameworks used.

2.1. Mental models of risk perception The experiments performed by Kahneman and Tversky (1979) have had a great impact on the knowledge of how individuals make decisions under uncertainty. The results from their research have given rise to the concept of mental models, where laypeople rely on mental shortcuts or heuristics to inform their decisions. Some examples of such heuristics are anchoring (i.e., the overestimation of the importance of the starting value in a calculation) (Tversky and Kahneman, 1974) and overconfidence (i.e., the overestimation of performance outcomes) (Barber and Odean, 2001). These mental models have been incorporated in the field of risk perception primarily by Slovic (1987) and the psychometric paradigm. This paradigm suggests that a risk can have several characteristics that increase risk perception. Some of these characteristics include perceived dread, severity of consequence, and unknown consequences (Slovic, 1987). For example, adverse effects that might cause cancer, a dreaded disease, will be associated with a high risk perception compared with an effect that might result in a quick and painless death. The connection between risk perception and actual behavior is, as mentioned in Section 1, weak and understudied. It is here assumed that a high perception of risk will be an incentive for laypeople to take action to protect themselves. With this assumption made, the impulse to act is considered likely to be stronger if combined with perceived dread, severity of consequence, and unknown consequences because these factors affect risk perception by increasing it. An underlying assumption of the mental models, not suggested directly by Kahneman and Tversky but by others, is that individuals make flawed and biased decisions and that one solution to this problem is to increase knowledge and make laypeople less emotional and more literate on matters of risk (Pixley, 2010). This common theme in the larger tradition of risk research is often referred to as the “knowledge-deficit” model (Frewer, 2004). The assumption underlying this reasoning is that lay models of decision making are flawed; therefore, if they can be made more similar to experts’ models (through education), laypeople will reach better decisions. The validity of this assumption can be questioned from many perspectives, one being the relationship between knowledge and perceived control. Even if individuals feel that they have sufficient knowledge of their own situation but perceive the outcomes of their decisions to be controlled by the actions of others, such as larger and more powerful actors, knowledge will have little effect on behavior (Perry and Morris, 2005). A more general critique against using the role of rationality and emotions to explain how individuals make judgments under uncertainty is the very unpredictability of the future. One legitimate question is how a decision about the future can be called “biased” when the future cannot be predicted with any certainty (Pixley, 2010).

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As mentioned in Section 1, laypeople rely on experts to govern the financial system and to invest on their behalf. A focus on expert knowledge has also influenced how differences between lay and expert perceptions of risks can be explained (Slovic, 1987). Laypeople often express a higher risk perception toward various risks, ranging from risks linked to genetically modified organisms to those associated with nuclear power, than do experts. This higher risk perception is sometimes interpreted as a lack of knowledge (Frewer, 2004). This also implies that those citizens who have more knowledge and are more interested in a specific topic will have a risk perception that is more similar to experts in the field; that is, they would not be the first to act rashly. Because the effects of knowledge on behavior have been previously discussed in the literature, we find it interesting to test if education, here used as a proxy for knowledge, and expressed interest in financial matters, have any influence on the decision to act or not to act in response to a major financial crisis. Presumably, a higher level of education and a greater interest in financial matters would indicate a reduced readiness to take action because these factors might indicate a better base for knowledge of the field of finances and, thereby, a more “expert-like” behavior. It could, however, be questioned if a crisis in financial markets can be viewed with the same lens as a natural catastrophe, or if the high volatility of financial markets would have educated laypeople act in a crisis in a way that they would think of as “rational” in response to market fluctuations. In that case, a major crisis might be regarded as something to be dealt with in the same way—that is, by taking some reasoned action to protect personal assets from being negatively affected. Because we do not know which people acted and what actions they took, we explore this by making an assumption about the direction of a presumed relationship and testing it. We also test if a relationship between knowledge and a general choice to act as a response to the crisis differs from that between knowledge and a choice to act rashly. In response to risks and crises of a different nature than financial, such as the presence of bisphenol A in plastic products or the threat from climate change, individuals tend to be quite passive. Because behavioral responses are complex matters, there is not one single explanation that accounts for this lack of response. However, as demonstrated by Kahan et al. (2007), belonging to a particular social or cultural group can shed light on why responses to risks differ. Kahan and colleagues demonstrated that specific values, such as beliefs in egalitarian values or in individualistic values, influence how individuals perceive risks. This group membership is strong and affects how information is processed (Cohen et al., 2000). For example, white males are more likely to have individualistic and hierarchical views and, thus, a lower risk perception compared with men and women of other ethnic groups. Possessing these views also makes white males more skeptical toward climate change and affects what information they judge to be credible (Kahan et al., 2007; Cohen et al., 2000; Finucane et al., 2000). It could be argued that being a man indicates a lower risk perception than being a woman and, hence, a lower likeliness to act when faced with a financial crisis. Women are often typecast as helpless and passive during a crisis because they are perceived as more emotional than men, whereas men are considered to be more practical during a crisis (Fordham and Ketteridge, 1998). These characterizations of men and women make it difficult to predict the effects of gender on the likeliness to take action. Being of Nordic origin (born or having parents born in Sweden, Finland, Denmark, Norway, or Iceland), and thereby belonging to an ethnic group with an assumed high level of trust in Nordic official institutions and their ability to handle a crisis of large proportions, could also indicate a lower risk perception and, therefore, a lower likeliness to act when faced with a financial crisis. Research has also reported that the cause of a crisis affects risk perception (Weisæth et al., 2002). For example, exposure to

naturally occurring radon is perceived differently than exposure to radon emitted from a commercial product, such as construction concrete. During a crisis (e.g., a flood, a landslide), people actively search for information so as to get an idea of what has happened, the magnitude of the event, and the effect it will have on them or those around them. Information about specific behavior is also of great interest—whether it relates to how to protect oneself or one’s family or how to contact authorities if help is needed (Wester, 2009). Research has also revealed that risks perceived as private are assessed as less severe than public risks because private risks are considered easier to take action against (Finucane et al., 2000). It could be assumed that individuals who perceive a financial crisis as a threat to the U.S. and global economies would assess this public risk as more severe and, thus, would be more motivated (perhaps out of fear and in response to media coverage) to take action than those who view it as only a threat to their household finances. When faced with unpredictable risks, individuals (most of whom lack knowledge and/or experience) tend to judge the probability of something bad happening to them as lower than the same event happening to someone else (Weinstein, 1989). Hence, individuals judge personal risks differently than general risks; that is, general risks are perceived to be greater (Sjöberg, 2001, 2003). One could argue that a higher perception of actions of others predicts an individual’s likeliness to take action—in that the more others are seen as active, the more general the crisis is perceived, and consequently, the more likely the individual layperson is to take action. When a risk turns into a crisis, people in general behave rather well; they do not panic or act irrationally or selfishly (Quarantelli, 1991; Dynes, 2006; Scanlon, 2006; Tierney et al., 2006; Sandin and Wester, 2009; Wester, 2011). Research has shown that in threatening situations, people work together to find survival strategies that are best for the group rather than the individual. Individuals are also unlikely to abandon (and are likely to help) people with whom they share strong social bonds (Cornwell, 2003). This finding indicates that even if a financial crisis is perceived as a huge threat to the individual, a decision to take action might not be the most common one. Laypeople might instead try to wait out the crisis, relying on local and international institutions to take care of the situation for them. They might feel that they are out of options to take any action to mitigate the effects of the crisis themselves.

2.2. Perception of financial risk and financial behavior For most individuals, decisions regarding larger financial matters, such as buying a house and developing a retirement plan, are not ones that are frequently made. Some scholars have argued that these decisions are so rare that they can be considered unique and that they do not provide a situation from which individuals can learn how to improve their financial decision making (Pixley, 2010). However, there are studies dedicated to exploring such rare individual financial decisions, as for example studies of consumers’ decisions about mortgage rates (Coulibaly and Li, 2007; Paiella and Pozzolo, 2007). We argue large international financial crises are comparable to those financial decisions that are seldom made because they are rarely occurring. Laypeople sometimes choose to take the advice of experts because they realize that they themselves cannot evaluate all possible outcomes of different financial decisions over a given period of time. Studies of how different attributes among financial advisors such as race and gender at the individual level affect consumers’ decisions (Bertrand et al., 2005; Weber et al., 2002), and studies that show how people invest differently depending on what sources they use to obtain financial advice (Mitchell and Moore, 1998; Gerhardt and Hacketha, 2009) are also interesting as advisors and sources of financial information might affect

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behavior in a crisis. These factors are however left out of this particular study. The results of several studies in risk psychology showing demographic differences in risk perception are also valid when it comes to financial behavior. Men are less likely to perceive a situation as risky and, therefore, more likely to take risks than women, and the same tendencies for an overconfidence among men can be seen here as in other risk studies (Barber and Odean, 2001; Weber et al., 2002; Harris et al., 2006; Byrnes et al., 1999). This overconfident position suggests that men are more likely to act as a response to a financial crisis than women. However, men also have a tendency to perceive less risk, which indicates that men are less likely to act than women, as previously stated in Section 2.1, where the assumption made was that high risk perception would lead to more likeliness to take action as a response to the crisis. The relationship between gender and action taken is therefore interesting to explore further. Another factor of risk psychology that enters into financial decisions is a tendency for individuals to be loss averse rather than variance averse when making a decision regarding financial risk (Kahneman and Tversky, 1979; Thaler et al., 1997; Duxbery and Summers, 2004; Engelberg and Sjöberg, 2007). This finding suggests that in a failing market, individuals are more likely to endeavor to increase the variance of their investments because they are more willing to gamble than secure their losses (Duxbery and Summers, 2004). This finding indicates that individuals who perceive that they have assets that they stand to lose are more likely to engage in some type of action compared with other individuals. Loss aversion and attitudes toward money reflect attitudes toward relationships among money, social status, and power (Engelberg and Sjöberg, 2007). If individuals place a high value on money as a marker of social status and power, they are more likely to experience vulnerability to financial risks and in losses on their investments. It seems that individuals who perceive themselves as vulnerable to social risks value money to a greater extent than do others (Engelberg and Sjöberg, 2007). Research has showed that the level of obsession with money (as measured by the money attitude scale) does not affect loss aversive behavior (Engelberg and Sjöberg, 2007). Put differently, individuals who perceive money to be important to them do not behave differently than individuals who are less obsessed with money. Laypeople also tend to have a bleaker image of the current and future states of the economy than do financial experts (Leiser et al., 2010). Future predictions show that 4 of 10 laypeople believe that the economy will get worse (Roland-Lévy et al., 2010). Factors that affect lay understanding of financial matters and, therefore, a presumed likeliness to act more like experts (i.e., not panicking) include education, income, job security, and economic training (Leiser et al., 2010). Financial literacy is regarded as the ability of individuals to make informed financial decisions based on the possession of sufficient information about financial concepts and instruments (Agarwal et al., 2009). Official reports (ALRC, 2005; OECD, 2009; Almenberg and Finicchiaro, 2011) have highlighted financial illiteracy among citizens. Evidence of a positive link between financial knowledge and financial behavior has been documented (Hilgert et al., 2003), and a lack of basic financial literacy among subprime borrowers has also been found (Gerardi et al., 2010). Laypeople with a higher level of education who consider it important to be knowledgeable and up-to-date about financial matters are supposed to be less likely to take action when a financial crisis occurs and presumably they are also not the first to act rashly. The literature cited here gives credence to this study’s aim to investigate the relationships between a number of factors that possibly affected lay consumers’ risk perceptions and thereby decisions to act or not to act as a response to the financial crisis of 2008. The

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study makes the assumption that high perception of risk leads to a higher likeliness to take action. Because there is a lack of evidence in the cited literature showing the effect of age on lay consumers’ decision making in crises, this consumer characteristic is added to the analysis, based on an assumption that older individuals might perceive themselves as having more to lose and, therefore, being more likely to take action to protect themselves. An intuitive variable—namely, the amount of worry about everyday household finances perceived by an individual—is also added to the analysis. It is assumed that individuals who worry a lot on a daily basis are more likely to take action so as to minimize their losses. Nine variables were formulated and modeled. We hypothesized that the following characteristics had an impact on the choices of laypeople in this study: gender, age, education, ethnicity, assets affected by the crisis, the perceived actions of others, worries about household finances, the importance attached to being knowledgeable and up-to-date about financial matters, and the distance of the crisis. A logistic regression was performed to investigate how the aforementioned individual features and perceptions influenced Swedish laypeople to act as a response to the financial crisis of 2008. We hypothesized that being a woman, being younger, having a higher level of education, being born or having at least one parent born outside the Nordic countries, perceiving oneself as having assets that will be affected by the crisis, believing others to have taken action as a response to the crisis, being more worried about everyday household finances, finding it important to be knowledgeable and up-to-date about financial matters, and perceiving the financial crisis as a major threat to the U.S. and global economies instead of as only a threat to household finances influenced Swedish laypeople to act as a response to the financial crisis. A second aim of the study was to determine whether any individuals acted rashly as a result of the perceived threat of the financial crisis and, if so, whether this group differed in any statistically significant way from the group of individuals that acted in a more financially circumspectly manner. Of course, an argument can be made that what is rational is in the eye of the beholder and that any action taken by an individual in response to a threat that is perceived as great can be defined as rational when analyzed in the context of the previous experiences of that individual. However, for the purpose of this study, we assumed that there exists a more financially circumspectly way of reacting financially to a major financial crisis (e.g., cutting down costs, seeking professional advice, spreading assets to differentiate one’s portfolio, making new investments) rather than a more rash way (e.g., selling off all stocks and bonds or withdrawing all assets from one’s bank).

3. The eruption of the financial crisis in 2008 and the Swedish case Although the causes of the financial crisis that erupted in 2008 have been widely debated, no one can deny that the consequences were felt globally. Some scholars have claimed that the sophistication and globalization of the financial market date back to the 1920s and that the reasons for the crisis in 2008 are in large part caused by the so-called credit cycle (Rötheli, 2010). Among economists, two groups can be identified: one group believes that the market should be left alone to sort out whatever problems arise, and the other group argues for better regulation and inspection of the financial market by governmental agencies so as to prevent crises of this sort from emerging (Lewis, 2010). It can also be argued that financial experts are the ones who behave badly, not ordinary citizens (Crotty, 2009). Indeed, scholars have pointed out that the introduction of policies supporting excessive consumption—not North American consumers themselves—caused the crisis of 2008

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(Rötheli, 2010). It is beyond the scope of this article to settle arguments on the ‘real’ cause of the crisis; however, what or who is perceived to be responsible for the financial crisis is important from the perspective of laypeople. A recent study found that the reasons for the crisis were believed to be a lack of supervision, stupidity, and a lack of morality (Leiser et al., 2010). Put differently, “financial institutions lent money they did not have to people who could not pay it back” (Lewis, 2010, p. 127). Individuals who were affected by the financial crisis tended to perceive it as involving more complex and morally relevant issues than those who were not affected to the same extent (Leiser et al., 2010). Some studies have revealed that the majority of laypeople felt somewhat or slightly affected by the financial crisis of 2008 (Leiser et al., 2010). However, the degree of severity of consequences depends on the specific consequence of the financial crisis for individuals, such as losing one’s job compared with funds or stocks falling in value. Recent findings have suggested that individuals who are most afraid of the negative consequences of the recent financial crisis are those with savings that they might need to tap into and those with full-time jobs that they are afraid to lose. Individuals with lower incomes, higher reliance on credits rather than savings, and insecure employment situations do not express fear of the consequences (Roland-Lévy et al., 2010). In addition, having some financial training or keeping up-to-date on financial matters makes individuals less likely to blame the current financial crisis on “malevolent agents for systemic dysfunctions” (Leiser et al., 2010, p. 137). In Sweden, it is estimated that the financial assets of citizens have increased 14-fold since 1980, primarily as a result of the increase in value of shares and funds (Bank-och finansstatistik, 2008). In Swedish financial markets, the banks are the largest actors with regard to the total assets. Three previous financial market crises—the fall in Swedish real estate and housing prices in the 1990s, the fall of the information technology sector during the early 2000s, and the subprime crisis in 2008—have stimulated changes in the Swedish financial system. For example, the processes for investigating credit worth in the loaning process have been made more efficient. This change suggests that Swedish households were not as vulnerable to fluctuations in financial markets to the same extent as North American households were when the worldwide financial crisis erupted in 2008. However, changes in financial markets can negatively affect not only mortgage and/or interest rates but also national industries and employment rates. The effects of the crisis led to changes in the Swedish financial market in October 2008. One measure of relevancy for ordinary citizens that was implemented by the Swedish government was an increase in the deposit insurance (the purpose of which is to protect the assets of individual savers if banks or other security companies go bankrupt) from D 25,0002 to D 50,000 so as to meet the European standard. Although rumors and reports in the Swedish media suggested that one major bank in particular was on the brink of collapse, no Swedish bank went bankrupt during this period of time. Carnegie, a Swedish investment bank, was however put under governmental control because of a loaning policy that was judged to be too generous. Sweden managed to survive the financial crisis relatively well compared to the United States and most other European countries. In the autumn of 2009, there were signs of an end to the crisis (SFA, 2010). Swedish Financial Accounts show that net assets of households were higher than ever in the last quarter of 2010, surpassing the last top note from the second quarter of 2007. In March 2011, Governor Stefan Ingves of the Swedish Riksbank said in an

2 Swedish krona is here converted to euro (10 SEK ≈ 1 euro) so as to make this information more accessible to a wider audience.

official speech that the financial crisis in Sweden was over and done with. This rapid recovery has been mainly attributed to the lessons learned from the Swedish financial crisis in 1991–1992 when legislative corrections were made so as to hinder the larger systemic effects of financial runs. The idea then was to provide legislative frameworks so as to prevent Swedish consumers from taking on too much personal financial risk, thereby protecting both the financial actors and the society as a whole. In 1994, a Swedish law on financial counseling was introduced, years before the European Markets in Financial Instruments Directive (MiFID), which has the same goal.

4. Method and data Because global financial crises are rare, there are few opportunities to study the actions of laypeople when faced with one. At the beginning of 2009 (just a few months following the eruption of the financial crisis in 2008), we created a survey to be distributed among a randomized representative sample of Swedish citizens. The survey, comprising 21 questions in total, was distributed by an independent market research institute, TNS/SIFO International, to its web panel. This web panel consists of participants recruited by telephone so as to ensure a representative sample of the Swedish population. Because the aim of this study was to compare individuals who had taken some action with those who had not, we decided to set a limit for the web-based questionnaires when the number of respondents in each group reached 500. For this reason, a response rate cannot be calculated. In the end, the group with individuals who had performed some action consisted of 523 respondents, and the group with individuals who had not taken any action consisted of 530 respondents. The survey had been distributed to 3138 respondents before the quotas were reached. In total, 3138 respondents were asked whether or not they had done something to protect their financial assets during the recent financial crisis. Of the total sample, 16.7% (n = 523) of respondents stated that they had taken some type of action to protect their money during the recent financial crisis. From the remaining respondents (n = 2615), a subsample of 530 respondents was randomly selected. The total sample in this study was then 1053 respondents who completed the questionnaire, divided into two comparably sized groups—individuals who had taken some action and those who had not taken any action in response to the financial crisis. After correcting for incomplete surveys (n = 12), the final sample consisted of 1041 respondents. Not in focus of this study, but as it might be of interest to others, Appendix shows the reasons given by the 530 respondents not taking action for their choice. A binary logistic regression was performed to assess the impact of a number of background variables and selection variables illustrating the impact of individuals’ perceptions of the crisis on their decision to act or not to act as a response to the financial crisis. From the questionnaire, 11 questions, representing background information and attitudinal data, were selected for further analysis. The variables used in the regressions are presented in Table 1. The dependent variable action choice (ACHOICE) is a binary variable illustrating whether or not respondents had taken any action as a response to the financial crisis. The question put forward to the respondents was a simple yes or no question. The explanatory variables in the model were constructed from answers to corresponding questions in the questionnaire. Gender (GEN) illustrates the respondents’ gender: male or female. Age (AGE) shows the respondents’ age; in the questionnaire, it comprised five categories, which were constructed into three variable categories (18–45 years, 46–67 years, 68 years and over) for the analysis.

Table 1 Variable definitions. Definition

n

Mean

S.D.

Min

Max

ACHOICE (dependent variable)

A binary variable indicating whether an individual has taken action in response to the financial crisis or not: Action = 1 No action = 0 A binary variable showing: Women = 1 Men = 0 A variable separating age groups: Age 18–45 = 1 Age 46–67 = 2 68 and over = 3 A variable indicating level of education: Primary and secondary school = 1 Upper secondary/senior high = 2 University education = 3 A binary variable showing if the respondent or any of her/his parents were born in any of the Nordic countries (Sweden, Norway, Denmark, Finland, Iceland) or outside: Born outside the Nordic countries = 1 Born in a Nordic country = 0 A binary variable indicating if the respondent believe the households’ assets to be financially affected by the crisis: Affected = 1 Not affected = 0 A variable indicating if the respondent thinks others have done anything as a response to the financial crisis: Not to a great extent = 1 To a great extent = 5 A variable indicating how the respondent felt on an everyday basis about her/his household finances: Worry seldom or never = 1 Constant worries = 4 A variable indicating the importance the respondent puts in being knowledgeable and updated on financial matters: Not at all important = 1 Very important = 5 A binary variable indicating the perception of the financial crisis as a major threat to the US and global economy instead of just a threat to household finances. Major international threat = 1 All others = 0

1041

0.49

0.500

0

1

1041

0.45

0.498

0

1

1041

1.70

0.662

1

3

1041

2.41

0.626

1

3

1041

0.08

0.265

0

1

1041

0.57

0.495

0

1

1041

3.06

0.895

1

5

1041

1.58

0.794

1

4

1017

4.16

0.711

1

5

1041

0.41

0.493

0

1

GEN

AGE

EDU

ETHN

ASSETSAFF

ACTofOTH

WORofHFIN

IMPofFINKN

MAJTHREAT

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Variable

801

802

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Education (EDU), originally comprising seven categories, was constructed into three categories measuring the respondents’ level of education: primary and secondary school, upper secondary/senior high, and university education. (The reader should note that a lower level of education is indicated with a lower number.) Ethnicity (ETHN), a dichotomous variable, was constructed as the answer to a direct question about whether or not respondents or any of their parents were born outside the Nordic countries (Sweden, Norway, Denmark, Finland, Iceland). A binary variable illustrating if the respondents felt that they were affected by the financial crisis was constructed (ASSETSAFF) from a 4-level scaled question indicating different ways of being affected. These were combined into two alternatives: financially affected by the crisis or not. A variable illustrating respondents’ perceptions of other people’s actions (ACTofOTH) defined to what extent the respondents believed that others had performed actions to protect their financial assets. Response scales were 1–5, with 1 representing “not to a great extent” and 5 representing “to a great extent”. The degree of worry the respondents felt about their household finances on an everyday basis was illustrated (WORofHFIN). Here the scale ranged from 1 to 4, with 1 meaning that the respondent seldom or never worried about household finances, 2 meaning the respondent rarely worried, 3 meaning that the respondent often expressed worry, and 4 meaning that the respondent experienced constant worry. The respondents were asked to rate the importance they placed on being knowledgeable and up-to-date about financial matters (IMPofFINKN) on a scale from 1 to 5, with 1 meaning “not at all important” and 5 meaning “very important”. (The reader should note that a lower level of importance associated with being knowledgeable and up-to-date is indicated by a lower number.) A sixth category of “Don’t know” was included in the questionnaire and coded as a missing value. A variable illustrating respondents’ answers to three different questions on the severity of the threat in different contexts was constructed (MAJTHREAT). First, the answers (coded on a 5-point Likert scale with anchor points of “not at all severe” and “very severe) to the following two questions were summed (alpha = 0.798): “How severe did you perceive the threat to the U.S. economy?” and “How severe did you perceive the threat to the global economy?” The result of this combination was used as the “External threat” from which an “Internal threat” was subtracted, leaving a variable that showed the difference between perceived external and internal threats. The “Internal threat” was determined with answers (coded on a 5-point Likert-scale with anchor points of “not at all severe” and “very severe”) to the following question: “How severely did you perceive the threat to household finances?” The obtained variable (MAJTHREAT) was converted to binary by coding scores of 2.5 and above as 1 and all other scores as 0, showing a distinction between respondents who definitely perceived the external threat as higher than the internal. Direct logistic regression was performed to assess the impact of these factors on the likelihood of respondents reporting action as a response to the crisis. In the second step of analysis of the data, the aim was to determine if there were differences between the two groups and, if so, what these differences were. According to the data, 523 respondents reported having taken action as a response to the financial crisis. Because the contextual setting of a large—and, from the perspective of laypeople, presumably unpredictable—financial crisis was the focus of this study, the term taking action was broadly defined in the questionnaire in relation to personal finances: “It can mean that you perhaps changed banks, adjusted the interest rate on any mortgage, or moved any investments from or between accounts or funds within or between banks.” The aim was to obtain information on all possible actions taken, and the respondents were given an open-ended question so that they could explicitly explain what action they had carried out. The diverse answers to this

Table 2 Different types of reported actions as a response to the financial crisis. Type of action

%

More aggressive investment strategy Made changes in investment strategy to secure assets Contacted bank advisor Paid off parts of mortgages/negotiated terms of mortgages Spread engagement by opening new bank accounts in different banksa Minimized household expenditures Completely changed bank relationship and left previous bank Actively sold off all bonds and stocks to be high on liquidity

5.0 45.7 4.6 12.9 14.3 1.2 5.0 11.2

Note: The number of observations is 481. a The deposit insurance, aimed at protecting the assets of individuals savers if banks or other security companies goes bankrupt, was raised the 6th of October 2008 in Sweden from D 25,000 to D 50,000 to meet European standard.

question were coded into eight alternative main actions taken, as shown in Table 2. In a second step the eight different coded actions were combined into two groups, illustrating two different action strategies: a circumspectly analysis-and-action strategy (AAS) and an “in rash”strategy (ARS). Of the respondents who had taken action, 16.2% comprised the ARS group. This group included respondents who had completely changed their bank relationship and left their previous bank and those who reported that they had actively sold off all bonds and stocks to achieve high liquidity. All other answers were coded as AAS (83.8% of the respondents who had taken action). A chi-square test for independence was conducted to compare the scores on the continuous variables for the AAS and ARS groups. 5. Results Direct logistic regression was performed to assess the impact of a number of factors on the likelihood that respondents would report that they had taken some financial action as a response to the eruption of the global financial crisis in 2008. The model contained nine independent variables (GEN, AGE, EDU, ETHN, ASSETSAFF, ACTofOTH, WORofHFIN IMPofFINKN, and MAJTHREAT). A check for multicollinearity showed no highly intercorrelated variables. The full model containing all predictors was statistically significant, 2 (9, n = 1017) = 212.318, p = 0.000, indicating that the model was able to distinguish between respondents who reported and those who did not report taking some financial action as a response to the financial crisis. The model as a whole explained between 18.8% (Cox and Snell R2 ) and 25.1% (Nagelkerke R2 ) of the variance in action status and correctly classified 68.8% of cases. As shown in Table 3, eight of the independent variables made a unique statistically significant contribution to the model, but one variable, MAJTHREAT, did not significantly contribute to the understanding of the dependent variable ACHOICE. The strongest predictor of taking some action as a response to the financial crisis is ethnicity, recording an odds ratio (OR) of 2.76. This finding indicates that respondents who came from or had a parent who came from a country outside the Nordic countries (Sweden, Finland, Norway, Denmark, Iceland) were almost three times more likely to have taken some action as a response to the financial crisis than those respondents who were born or had at least one parent who was born in a Nordic country, controlling for all other factors in the model. The OR value for the perceived importance of knowledge about financial matters variable is 2.11, which indicates that respondents who perceived being up-todate about financial matters as important were 2.11 times more likely to choose to take action than those who did not rate it as

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803

Table 3 Logistic regression predicting likelihood of the choice of action as a response to the financial crisis of 2008.

GENDER AGE EDU ETHN ASSETSAFF ACTofOTH WORofHFIN IMPofFINKN MAJTHREAT Constant

B

S.E.

Wald

p

Odds ratio

−0.291 0.514 0.402 1.015 0.546 0.561 −0.219 0.748 −0.31 −6.580

0.146 0.112 0.118 0.278 0.147 0.083 0.092 0.111 0.147 0.655

3.980 21.119 11.636 13.355 13.701 45.521 5.631 45.375 0.044 100.810

0.046* 0.000*** 0.001*** 0.000*** 0.000*** 0.000*** 0.018* 0.000*** 0.835 0.000***

0.748 1.672 1.495 2.759 1.726 1.752 0.804 2.113 0.970 0.001

95.0% C.I. for odds ratio Lower

Upper

0.562 1.343 1.186 1.601 1.293 1.488 0.671 1.699 0.728

0.995 2.081 1.883 4.754 2.304 2.061 0.963 2.626 1.292

Note: The dependent variable is ACHOICE. The number of observations is 1016. The Cox and Snell R2 is 0.188; the Nagelkerke R2 is 0.251. * Statistically significant at the 0.05 level (2-tailed). *** Statistically significant at the 0.001 level (2-tailed).

important, controlling for all other factors. Although the perception of actions of others predictor was not as strong as the two previously mentioned predictors, it does have an OR value of 1.75, indicating that respondents who thought others had taken some action as a response to the financial crisis were more likely to act themselves than those who thought others had not acted. The perception of having assets that could possibly be negatively affected by the financial crisis recorded an OR of 1.73, indicating that respondents with assets who thought they would be affected did take action to a greater extent than those without any assets to protect, controlling for all other factors in the model. Age recorded an OR of 1.67, an indication that older respondents were more likely to take action than younger ones, and education showed the same pattern of importance (OR, 1.50), indicating that the more educated took action to a greater extent than did the less educated. A weaker predictor was the variable showing that respondents reported worrying about their own personal financial situation. An OR of 0.80 and a negative sign before the beta value indicate that respondents perceiving larger threats to their personal finances on an everyday basis were less likely to take any action. Gender was the weakest predictor, and an OR of 0.75 and a negative sign before the beta value indicate that women were less likely than men to take action as a result of the financial crisis, controlling for all other factors in the model. However, the variable indicating that respondents who considered the threat to the U.S. and global economies to be greater than the threat to household finances did not make a statistically significant contribution to the model and, therefore, did not significantly affect the decision to take action or not to take action as a response to the financial crisis. We then explored differences between the groups that adopted different strategies of action as a response to the financial crisis. To compare scores on the variables that were demonstrated to be statistically significant for ACHOICE in the regression (GEN, AGE, EDU, ETHN, ASSETSAFF, ACTofOTH, WORofHFIN, and IMPofFINKN) for respondents who adopted AAS or ARS, we performed a chi-square test for independence. The test showed no significant associations between GEN and action strategy, 2 (1, n = 481) = 0.20, p = 0.66, phi = −0.03; between AGE and action strategy, 2 (2, n = 481) = 0.06, p = 0.97, phi = 0.01; or between ETHN and action strategy, 2 (1, n = 481) = 0.00, p = 0.99, phi = 0.01. The test indicated a statistically significant association between the variable ASSETSAFF and action strategy, 2 (1, n = 481) = 3.85, p = 0.05, phi = −0.10, but with a small effect size (Cohen, 1988). A significantly higher percentage of respondents who chose AAS had assets that they believed to be affected by the financial crisis (71%) than those who chose ARS (59%). For the variables EDU, ACTofOTH, WORofHFIN, and IMPofFINKN, the assumptions of the chi-square test concerning the minimum expected cell frequency were violated. To check for any

differences between the two groups of action strategies, the variables were reconstructed in the following way: for EDU, categories 1 and 2 were combined; for ACTofOTH, categories 1 and 2 were combined; for WORofHFIN, categories 3 and 4 were combined; and for IMPofFINKN, categories 2 and 3 were combined. The chisquare test indicated a statistically significant association between EDU and action strategy, 2 (1, n = 481) = 5.56, p = 0.02, phi = −0.11 (considered a small effect size). A significantly higher percentage of respondents who chose AAS (59.3%) had a higher level of education than those who chose ARS (41%). However, the chi-square test showed no significant associations between ACTofOTH and action strategy, 2 (3, n = 481) = 3.17, p = 0.37, phi = 0.08, and between WORofHFIN and action strategy, 2 (2, n = 481) = 0.62, p = 0.73, phi = 0.04. The test showed a significant association between IMPofFINKN and action strategy, 2 (2, n = 476) = 6.56, p = 0.04, phi = 0.12, considered a small effect size, according to Cohen (1988). A significantly higher percentage of respondents who chose ARS (52.6%) scored high on the importance of being knowledgeable and up-to-date about financial matters than those who chose AAS (39.2%). 6. Discussion and conclusion The data presented here is derived from a survey distributed to a representative sample of the Swedish population; the purpose of which was to investigate how citizens behaved during the global financial crisis of 2008. In the present study, we set out to determine whether or not laypeople took any action to protect their assets from being affected by the crisis and, if so, what factors influenced their decision to act and what these actions were. We also wanted to study if there were any differences between the group that acted circumspectly and the group that acted rashly as a response to the crisis. We find support for earlier results showing that a majority of laypeople tend to remain inactive in a major crisis situation. The results presented suggest that in their role as consumers or citizens, laypeople generally do little or nothing when faced with a crisis that might affect them in a very concrete and real way. This lack of response cannot be explained by a lack of knowledge or by a decision to focus on only information that confirms an already established opinion. Instead, it can be interpreted as a sense of resignation expressed by individuals when encountering situations and forces that are far removed from their control. This explanation is in line with results from a large body of studies of responses to other kinds of crises. In light of this finding, official agencies and governmental responses should focus on the large majority of individuals and address their concerns, which obviously are others than those leading to a feared possible bank-run. Whatever strategies are chosen by a government in response to a crisis need to

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be clearly communicated and the estimated goal of such measures must also become clear to affected individuals. In many crisis situations, there is a fear that citizens will panic and engage in counterproductive behavior. Even in Sweden things were rough during some very extreme days of financial crisis in the autumn of 2008. Media reported on sub-prime loans in the US and on the Lehman crisis, on Icelandic banks going into bankruptcy and on Swedish banks’ exposure in the Baltic countries, to take some examples of the massive communication toward laypeople that went on during this autumn. It might be that Swedish consumers, due to the already lived through financial crisis of 1991, were more prepared than citizens of other countries. Irrespective of the reasons for this the fear of panic among citizens was not realized in Sweden during and in the aftermath of the financial crisis of 2008. However, 16.7% of the respondents in this survey did take action in what they believed to be a real threat. This empirical study investigated the effects of a number of theoretically and intuitively based variables on the decision to act or not to act as a reaction to the eruption of the global financial crisis. We hypothesized that the following characteristics influenced Swedish laypeople to take action as a response to the financial crisis: being a woman, being younger, having a lower level of education, being born or having at least one parent born outside the Nordic countries, perceiving oneself as having assets that will be affected by the crisis, believing others to have taken action as a response to the crisis, being worried about everyday household finances, finding it important to be knowledgeable and up-to-date about financial matters, and perceiving the financial crisis as more a major threat to the U.S. and global economies than a threat to household finances. This study of a sample of 1017 laypeople gives support to the hypothesis (thereby rejecting the null hypotheses) that age, possession of assets affected by the financial crisis, ethnicity, perception of others’ actions, and importance placed on being knowledgeable and up-to-date about financial matters affect the choice of laypeople in the direction hypothesized. Here risk perception seems to work as indicated by the findings of others. The statistical significance of the variable ethnicity should be of special interest to policy-maker. Laypeople of non-Nordic origin have a higher propensity to take action than the respondents of Nordic origin, maybe indicating differences in trust in institutions that need to be looked into more extensively. Three variables had an inverted relationship with the dependent variable compared to what was hypothesized. Women were less likely to take action as a response to the crisis. Being a man would therefore predict a likeliness to act as a response to a financial crisis, which is in line with some earlier findings showing perceptions of low risk by males in combination with overconfidence in their own ability to carry out the correct action. Even though males seemed to value the risk to be lower than did women, they did act, most likely as a consequence of a male overconfidence. Respondents that worried about their everyday financial situation were less likely to take action than those who did not worry as much. A reason for this finding might be that those who worried a great deal about everyday household finances had nothing—or almost nothing—to lose financially and, therefore, did not have any options to take action. This study finds no evidence that perceiving the threat to the U.S. and global economies to be worse than the threat to their household finances would affect respondents’ choices. Education seems to work in the opposite direction than was hypothesized, in that respondents with higher levels of education are more likely to take action than those with lower education. This is contrary to the idea that being more expert-like, that is, having a high level of knowledge, would indicate a lower risk perception and thereby a less likeliness to act. It might be that this group—as well as the experts—acts in a calculated way not perceiving the crisis to be a threat but a financial opportunity. An indication of this is given be the results from the second step in the study.

It should be of interest to policymakers to explore features of the group of laypeople that did act rashly as a reaction to the eruption of the financial crisis because this group is the most important target group for consumer information and protection. This study finds no significant differences between the two groups in terms of the respondents’ gender, age, ethnicity, perceptions of the actions of others, and articulated worries about household finances. However, when looking for traits of the group of individuals that acted rashly we find a higher likeliness for individuals who do not think they have assets affected by the crisis, individuals who have a lower level of education, and individuals who consider it important to be knowledgeable and up-to-date about financial matters. These features indicate that those laypeople need more—or better—information about how to act in response to a major financial crisis. The fact that the place a high importance on being knowledgeable and up-to-date about financial matters might make this information effort easier. Officials would benefit from developing a deeper understanding of why citizens do what they do and from adapting official strategies and communication accordingly as a way of reducing panic among the most vulnerable and, thereby, enhancing consumer protection. It is the less educated who, even though they do not think they have any assets affected, think it is important to have knowledge of the field of finance, that perceive such high risks that they decide to act rashly and sell all their investments or completely change bank. Instead of informing all citizens about general consumer protection in a financial crisis situation, it might make more sense to identify the group that is most likely to act rashly and direct pertinent information more specifically toward it. There is, for example, no point in raising a country’s deposit insurance as a way of generally communicating that the system is reliable when the most vulnerable citizens lack the understanding of the point of this action. This finding is an important argument of the need for the development of financial literacy programs. However, the need for general programs being discussed worldwide does not seem to be as great as the need for more specifically targeted actions directed toward the most vulnerable. Appendix. Respondents reported reasons not to act as a response to the financial crisis of 2008. Reported reasons

%

Waited the crisis out Terms were no better elsewhere Assets were not affected by the crisis Damage already done Something else

24.7 29.8 39.2 15.5 6.4

Note. Respondents could report more than one reason.

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Misse Wester has a PhD in psychology and is currently working as a researcher at the Royal Institute of Technology, Stockholm, Sweden. Her main research interests lie in differences in risk perception between actors such as experts and lay people, and how these differences affect risk and crisis communication. She is also interested in evaluating the effectiveness of strategies aimed at reducing different risks.