Having a robust emergency savings fund could help people weather financial shocks, such as job loss during the COVID-19 pandemic, finds a new study from the Brown School at Washington University in St. Louis.

“We found that for individuals who lost jobs, those with at least three months’ worth of emergency savings were significantly less likely to tap into their retirement savings early,” said Haotian Zheng, a Ph.D. candidate and lead author of an article published this month in the Journal of Consumer Affairs.

“Ultimately, this study emphasizes the importance of emergency savings in helping workers stay financially resilient during crises,” Zheng said. “Building and maintaining a sufficient emergency savings can help people protect their long-term financial security by reducing the need for premature withdrawals from retirement accounts during periods of unexpected income loss.”

Researchers, including Stephen Roll, an assistant professor at the Brown School, surveyed 2,923 respondents; 60% of the baseline data were collected in April 2020, during which the unemployment rate peaked at 14.4%.

Twenty percent of those in the sample experienced a job loss, and 10% were forced to withdraw money from their retirement savings.

Overall, the study points out the need for workers to plan ahead financially, Zheng said.

“This study suggests that in the event of another pandemic or large-scale economic disruption, workers without sufficient emergency savings and/or financial knowledge could be at a higher risk of making less desirable financial decisions, such as withdrawing from retirement accounts prematurely,” he said.

Employers’ role

Businesses and organizations can play a role in helping their workers prepare for future hardship, the researchers said.

“Employers could offer structured emergency savings programs, automatic payroll deductions or matching contributions to make it easier for workers to accumulate savings,” Roll said.

“By supporting these savings efforts, employers can help safeguard their employees’ financial well-being, which in turn fosters a more secure workforce, ultimately benefiting both the individuals and the organization.”

Employment is one of the most important institutions in determining financial security, particularly during times of crisis.

“Given that personal savings rates are often low, relying solely on individual efforts to save for emergencies may not be sufficient or ideal,” Zheng said. “Institutional efforts, such as employer-driven initiatives, are likely to be more effective in helping workers build the necessary financial buffer.”

When making economic decisions, humans can be driven by various factors, including their goals and emotions. Past studies have hypothesized that emotions play a crucial role in economic decisions, particularly those that involve risk or trade-offs between immediate and future benefits.

Researchers at Stanford Graduate School of Business, Stanford University and University of Chicago Booth School of Business recently set out to investigate the relationship between emotions and economic choices in greater depth by analyzing a large multi-national dataset.

Their findings, published in Nature Human Behaviour, unveiled distinct patterns in the extent to which emotions predict economic decisions across several countries worldwide.

“In 2019, we encountered a new dataset that measured how individuals make financial decisions around the globe,” Samuel Pertl, co-author of the paper, told Phys.org. “We were fascinated by this dataset, and as we delved deeper, we discovered an additional layer of information that the original research team had not explored: participants’ emotional experiences.

“This aspect intrigued us because most prior research on the influence of emotions on decision-making has been conducted in a few highly developed countries, primarily the U.S. With nationally representative samples from 74 countries, we saw an opportunity to test whether the relationship between emotions and economic decision-making replicates and generalizes on a global scale.”

Some theorists previously proposed that the link between emotions and economic choices could be universal and thus exhibits similar patterns across different countries. The key objective of the recent study by Pertl and his colleagues was to test this hypothesis, by analyzing data from the Gallup World Poll and Global Preferences Survey, two large-scale surveys spanning a total of 74 countries.

“To examine how emotions influence economic decision-making, we employed two different approaches,” explained Pertl. “There are already many existing studies examining how incidental emotions influence individuals’ intertemporal or risky decisions. As a first step, we summarized these studies through a meta-analysis, which pools together existing findings and summarizes them into an average relationship.”

The meta-analysis carried out by the researchers unveiled that most past studies were conducted with non-representative samples, typically from a few Western countries.

This encouraged them to carry out a global analysis, leveraging large multi-national datasets. Collectively, Pertl and his colleagues analyzed the survey responses of 77,242 individuals residing in 74 countries.

“Each respondent was asked about their emotional experiences—specifically, whether they experienced happiness, enjoyment, sadness, worry, anger, stress or pain during most of the previous day, with each emotion measured separately,” said Pertl.

“The dataset also captured how individuals made economic decisions, such as choosing between a smaller immediate reward versus a larger future reward (intertemporal decision), or between a certain smaller reward versus an uncertain larger reward (risky decision).”

Using statistical methods, the researchers looked at whether emotions predicted the economic decisions of survey respondents, controlling for various factors, including demographics, language differences and geographical location. To determine whether the link between emotions and economic decision-making was in fact universal, they compared the patterns they observed across different countries.

“I believe the most notable finding from our paper is that there is substantial and systematic cross-country variation in whether and how emotions predict economic decision-making,” said Pertl. “For example, it has been proposed that being in a positive mood leads to greater patience (i.e., individuals are more willing to wait for a delayed reward).

“However, our analyses suggest that this relationship is far from universal. We found that while being in a positive mood was associated with greater patience in 53 countries, it was linked to greater impatience in 21 countries.”

Interestingly, Pertl and his colleagues also found that the cross-country differences in the relationships between emotions and economic decision-making can be explained. Specifically, they found that emotions were stronger predictors of economic decisions in more economically developed countries (measured using the Human Development Index) and in more individualistic countries (measured using Hofstede’s Individualism Index).

“Our findings underscore the need for more diverse samples when studying fundamental questions about decision-making,” added Pertl. “While I am now exploring questions in a different research area, my co-authors are still working on several projects related to how emotions influence decision-making.”

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