Understanding the mental health-based poverty trap: Dynamics in psychological distress and financial precariousness, and the role of self-efficacy

A growing body of evidence suggests poor mental health is associated with sub-optimal economic preferences and behaviours. However, much of this evidence is correlational, and this paper aims to address a call for more research on dynamics. We use rich panel data to evaluate within-individual dynamics in financial management and mental health. We observe increased (decreased) difficulty in managing financial affairs following periods of increased (reduced) psychological distress. Importantly, these dynamics occur in the absence of observable changes to objective financial circumstances (i.e. income and wealth shocks), and are robust with respect to a range of alternative approaches to measurement. Further, we show that most of the association between change in psychological distress and change in financial precariousness (concurrently and subsequently) can be attributed to change in self-efficacy. This supports the idea that investment in mental health will yield important additional benefits via the capacity to empower individuals to make better decisions and escape mental health-based poverty-traps.