2.1. Subjective and Financial Well-Being

SWB has long been investigated as a means to measure the ever elusive concept of “utility.” SWB enables researchers to study social and psychological aspects of life and their relation to economic outcomes, providing a reasonable proxy for experienced utility (Helliwell and Barrington-Leigh, Reference Helliwell and Barrington-Leigh2010; Dolan, Peasgood and White, Reference Dolan, Peasgood and White2008). Although the level of SWB can be changed due to objective events or circumstances, there is no universal relationship, as each individual exhibits different preferences (Kahneman and Krueger, Reference Kahneman and Krueger2006).

Easterlin’s (Reference Easterlin1995) work has found that more money raises SWB at low levels of income, but does so less and less as income raises; in other words, there is a decreasing marginal utility to income. This is largely because income helps individuals meet certain universal needs (e.g., food, shelter, clothing), which makes a drastic difference for individuals in poverty (Diener et al., Reference Diener, Sandvik, Seidlitz and Diener1993). Once those basic needs are met, the effect of income is stronger when relative (rather than absolute) income is measured. Therefore, research on relative income is relevant in discussions of well-being (Miles and Rossi, Reference Miles and Rossi2007).

Relative income considers one’s income relative to others. Although people do not often know how much the people around them earn, the literature on relative income suggests that it considers changeable standards derived from expectancies, standards of living, and social comparisons (Diener et al., Reference Diener, Sandvik, Seidlitz and Diener1993). Both absolute and relative income have implications for perceived well-being but have different effects at different levels of development (Blanchflower and Oswald, Reference Blanchflower and Oswald2004; Chang, Reference Chang2013; Clark and Oswald, Reference Clark and Oswald1996). For example, absolute income has a large effect on utility for people in poverty, whereas relative income has a larger effect on utility for people in more developed countries.

While SWB is helpful for understanding overall utility, it is usually measured in a global, context-free manner, that is, with survey questions asking questions like “How happy are you with your life as a whole these days?” Global SWB certainly has its place, but narrow, context-specific well-being, which is assessed in a single area of life, can be more helpful for designing policy instruments with the intent to improve well-being. Van Praag, Frijters, and Ferrer-i-Carbonell (Reference Van Praag, Frijters and Ferrer-i-Carbonell2003) proposed a model where SWB depends on satisfaction with different domains of life: work, financial, household, health, leisure, and environment. Their tests found that financial satisfaction was the strongest indicator of total SWB.

Other research has found a similar relationship. A study by Gerrans, Speelman, and Campitelli (Reference Gerrans, Speelman and Campitelli2014) examining the effects of financial literacy interventions found that financial wellness was one of the strongest contributors to SWB. Satisfaction with one’s financial status, or FWB, relies more on objective measures than does SWB (e.g., assets, debt, etc.), but those objective factors cannot completely account for variation in FWB among individuals, as individuals exhibit different preferences for living standards (Brüggen et al., Reference Brüggen, Hogreve, Holmlund, Kabadayi and Löfgren2017). FWB is still strongly affected by subjective factors, like financial knowledge, attitudes, and behaviors (Gerrans, Speelman, and Campitelli, Reference Gerrans, Speelman and Campitelli2014; Shim et al., Reference Shim, Xiao, Barber and Lyons2009).

Brüggen et al. (Reference Brüggen, Hogreve, Holmlund, Kabadayi and Löfgren2017) defined FWB as "the perception of being able to sustain current and anticipated desired living standards and financial freedom" and discussed FWB’s distinction from financial efficacy. Financial efficacy surrounds a person’s skills and ability to control their financial matters. While financial efficacy can be one factor in FWB, FWB more broadly reflects a person’s ability to enact change.

2.2. Perceived Control

While financial efficacy is about having the necessary knowledge to control one’s finances, an individual may still feel they have little control over their finances. This concept has been studied in the psychology literature as perceived control and LOC. LOC is a concept that captures an individual’s perception of their ability to control what happens to them. It is generally divided into two categories—internal and external (Prawitz et al., Reference Prawitz, Kalkowski and Cohart2013; Sumarwan and Hira, Reference Sumarwan and Hira1993). An individual with an internal LOC believes they are personally responsible for what happens to them, while someone with an external LOC believes that events in their life are the result of external factors, such as chance, fate, or powerful others. LOC has been called a companion concept to self-efficacy; control is perceived by the individual, although its perception is often based on past experiences (Lybbert and Wydick, Reference Lybbert and Wydick2018).

An individual’s LOC can affect their decisions by changing the perceived probability that their decisions will result in their desired outcome, affecting an individual’s choices and the desired outcomes themselves. An individual who attributes events in their lives to external factors alone may feel that they cannot change their circumstances because the effort they put in will have little effect on achieving the desired outcome. Further, LOC can also affect a person’s views of their current circumstances. LOC has been linked to life satisfaction (Johnson and Krueger, Reference Johnson and Krueger2006) and related well-being indicators. Individuals with a more internal LOC tend to report greater satisfaction with various aspects of life. In the financial realm, an internal LOC has been linked to greater perceived income adequacy and satisfaction with one’s financial status (Prawitz, Kalkowski, and Cohart, Reference Prawitz, Kalkowski and Cohart2013; Sumarwan and Hira, Reference Sumarwan and Hira1993). Danes’ (Reference Danes1991) study of farm women found that an internal LOC was a significant predictor of the perceived gap between living standards and living levels; women with a more internal LOC perceived a smaller gap between living standards and levels.

Throughout the literature on perceived control and LOC, there is no consensus regarding whether LOC is a consequence of past outcomes and circumstances, or a trait that affects decisions and perceptions, which then have implications for current circumstances and future decisions. Many studies implicitly assume that LOC determines behavior, but others have noted that the direction of causality may be reversed (Gerstenberg et al., Reference Gerstenberg, Ullman, Nagel, Kleiman-Weiner, Lagnado and Tenenbaum2018; Grinfeld et al., Reference Grinfeld, Lagnado, Gerstenberg, Woodward and Usher2020). Further, LOC is often assessed in a very general sense, rather than in relation to specific domains of life. Furnham (Reference Furnham1986) was the first to apply LOC to the financial domain, proposing an economic LOC scale. Survey respondents were asked their views on statements surrounding poverty, economic mobility, and wealth in relation to internal and external factors. Furnham’s scale distinguished between different types of internal and external factors, including work ethic, luck, fate, and powerful others.

Furnham’s economic LOC scale has been criticized for losing the previously considered unidimensionality of LOC. Interestingly, Furnham’s research found that both the richest and the poorest groups had the lowest internal LOC. An analysis of the sub-scores for the different factors reveals that each group had drastically different reasons for this. Poorer individuals had high “powerful others” scores, attributing their circumstances to power imbalances that hinder economic mobility. Wealthy individuals had higher “chance” scores, with the author noting that at high levels of wealth, there is a greater amount of risk in relation to investments and gross economic forces.

2.3. Goals and Aspirations

Much of the research surrounding perceived control and well-being focuses on past or current events and circumstances; however, perceived control also has the potential to affect future behavior through influencing an individual’s goals and aspirations. The relationship between perceived control, goals, and aspirations has been studied less in the realm of economics. While there is a plethora of psychology research surrounding goals and aspirations, much of it focuses on personal affective characteristics and cognitive biases (Locke and Latham, Reference Locke and Latham2006).

It has been shown that one’s LOC has a connection to aspirations. Burlin’s (Reference Burlin1976) study of career aspirations for high school girls investigated how an internal or external LOC influenced occupation aspirations. Subjects answered questions that would later lead to an internal-external LOC classification, as well as their occupational aspirations in an “ideal world” versus their actual occupational intentions. Girls with an internal LOC were more likely to choose occupations categorized as “innovative” in the “ideal-world” scenario. Girls with an external LOC were more likely to perceive that their futures were dictated by the “system,” choosing more traditionally female occupations, even in a hypothetical scenario where gender norms did not apply. However, when asked about their realistic intentions to choose an occupation, both types indicated they would choose more traditionally female occupations. While these findings have implications for the study of identity and gender norms, they also have implications for aspirations research, implying that an external LOC limits individuals’ ability to aspire to heights which they might otherwise not aspire (Akerlof and Kranton, Reference Akerlof and Kranton2000, Reference Akerlof and Kranton2010).

A study by Prawitz, Kalkowski, and Cohart (Reference Prawitz, Kalkowski and Cohart2013) examined the relationship between LOC and hope in the context of personal finances. Findings showed that individuals with an external LOC tended to be less hopeful about their financial futures and were less likely to direct efforts toward the achievement of financial goals. This suggests that LOC is an important factor in making progress toward goal achievement, but the study did not examine how LOC comes into play when an individual is conceiving of the goals themselves. The authors discuss the results of their analysis within a framework of goals; however, their surveys asked respondents whether they participated in various financial adjustment behaviors in recent months, such as cutting spending, dipping into savings, or postponing major purchases. The vast majority of “goals” were evaluated as such after the fact and represented behaviors or actions more than goals.

Danes and Rettig (Reference Danes and Rettig1993) studied the role of perceived control in the intention to change one’s family financial situation. They defined intentions as “plans of action in pursuit of behavioral goals” using a survey that asked subjects their likelihood of changing their overall financial situation. The authors noted that both financial resource flexibilities and perceptual factors, like LOC, can influence such intentions. Findings showed that perceptual factors were crucial in the intention to change the family financial situation, in most cases outweighing resource flexibility factors. This again indicates the importance of perceived control but does not examine how it affects the setting of the goals themselves.

While the desired outcomes of goals are important for many individuals wishing to change their financial situation, it has been shown that the mere act of setting goals can improve outcomes. A study by Aguinaga et al. (Reference Aguinaga, Cassar, Graham, Skora and Wydick2019) examined the effects of various interventions designed to help bring individuals out of poverty. Subjects participated in an experiment where they were asked to set a goal each month (selected from a list compiled by the researchers) and surveyed over the course of the months, where they were also randomly assigned to other interventions such as attending support groups or given monetary incentives for completing goals, or given no intervention beyond goal setting. The simple act of setting a goal was shown to be significant in improving financial outcomes, independent of the other interventions.

Interventions can help people in poverty set goals, but many in poverty lose hope and aspire to less than what they optimally could achieve. Dalton, Ghosal, and Mani (Reference Dalton, Ghosal and Mani2016) studied this phenomenon, called aspirations failure. They argue that wealthy and poor people share the same preferences and behavioral biases in setting aspirations, but that poverty exacerbates the effect of a behavioral bias where people fail to realize how much their effort influences their aspirations. This results in a cycle where aspirations gradually lower. The authors view their framework as “the first step in a bigger project,” noting while poverty itself is linked to lower aspirations levels, it does not fully explain lack of aspirations.

It should be noted that although goals and aspirations are conceptually similar and the terms are often used interchangeably, they are distinct notions. Aspirations represent a broad hope or ambition of achieving something (Kremer, Rao, and Schilbach, Reference Kremer, Rao and Schilbach2019). For example, an individual might aspire to be wealthy or have a successful career. Aspirations are often based on societal norms; with the example of aspiring to have a successful career, societal norms dictate what “successful” is. Lybbert and Wydick (Reference Lybbert and Wydick2018) regard aspirations as exogenously given, whether by culture, norms, environment, or one’s peers. This is a sentiment echoed by others, including Easterlin (Reference Easterlin1995) who proposed that aspirations can influence happiness, but that aspirations likely vary with levels of economic development. Goals, on the other hand, are more precise. A goal is a “discrete, tangible, extrinsic reward that has real consequences for physiological well-being” (Heath, Larrick, and Wu, Reference Heath, Larrick and Wu1999). Goals relate to specific objectives. Therefore, while one’s aspiration could be to “achieve financial freedom,” there are a variety of goals that could underpin the aspiration, like “pay off my student loans” or “save $5,000 this year.”

Heath, Larrick, and Wu (Reference Heath, Larrick and Wu1999) model of goals as reference points provides a valuable framework for researching goals. In this framework, goals alter the psychological values of outcomes, affecting how individuals exert effort toward goals. Analyzing goals using prospect theory, the authors equate goals to reference points on a value function, where individuals experience loss aversion and diminishing sensitivity to gains and losses, which varies the closer or farther they are from their goal. In this model, people are risk-seeking when they are below their goals and will be more likely to make aggressive goals. In addition, higher goals (relative to one’s position on the value function) tend to guide individuals to exert more effort toward achievement of their goals and persist longer. Nevertheless, diminishing sensitivity means that those at extreme ends of the value function may have less motivation to achieve their goals. This theoretical model presents further basis for the study of goals and how an individual’s position relative to the goal (e.g., having low FWB versus a higher FWB) can affect goal setting.

3.1. A Proposed Conceptual Framework for Economic Enfranchisement

Economic enfranchisement is the extent to which a person has influence on their economic well-being. This concept is similar to LOC but distinct in some important ways. First, LOC focuses on perceived responsibility (or lack thereof) for life events. It does not take into account the individual’s skills, knowledge, or agency to change their economic well-being. Per Rotter (Reference Rotter1966), LOC assesses whether an individual believes their behavior is linked to its consequences. Economic enfranchisement, on the other hand, takes into account both internal (perceptual) and external (objective) constraints and focuses on the degree of personal influence on personal economic outcomes.

One of the greatest criticisms of the LOC concept is that it is not unidimensional (O'Brien, Reference O'Brien and O'Brien1981). LOC is thought to be internal or external; however, many have theorized that there are different types of externals. An individual’s belief that external factors are responsible for the events in their life could be referencing drastically different external factors, such as power structures or fate. Furnham (Reference Furnham1986) noted this distinction when developing his economic LOC scale. Because of this, it can be difficult to consider the relationship between perceived control and issues of economic mobility. If the rich and the poor both feel that external factors are responsible for their life events, while the middle class feels the opposite; the concept of LOC has limited applicability for studying economic mobility.

Economic enfranchisement implies a unidimensionality from enfranchised to disenfranchised. Consider the example of a poor and a wealthy person who both have an external LOC. It is valid for both to have an external LOC, but the poor person may feel that way for reasons of systematic economic barriers, while the rich person may feel that way due to the riskiness of their investments. In the framework of economic enfranchisement, however, the wealthy person in this example would not feel disenfranchised due to these risky investments, while the poor individual would likely feel disenfranchised due to the systematic barriers.

Economic enfranchisement recognizes the importance of economic, psychological, and social factors when assessing well-being and the opportunities for change. Economic factors include the availability of resources; psychological factors include internal biases and perceptions; and social factors include one’s circumstances and environment. For this reason, it is a better measure for assessing economic mobility, goals, and aspirations than LOC.

There are notable gaps in the literature surrounding economic enfranchisement and goal setting. While there has been research studying the relationship between perceived control and hope or aspirations, economic literature has not explicitly studied economic enfranchisement as it is conceptualized in this paper. Further, the research on goals focuses on aspirations, effort toward goals, intention to change, or the efficacy of poverty interventions where individuals choose from exogenously dictated goals. Heath, Larrick, and Wu (Reference Heath, Larrick and Wu1999) model of goals as reference points indicates that the individuals who are relatively worse off have greater incentive to set higher goals, but if they are too worse off (e.g., the worst off person in the community), they may have difficulty getting started, a phenomenon referred to as the “starting problem.” We also build on Dalton, Ghosal, and Mani (Reference Dalton, Ghosal and Mani2016) research on aspirations failure, which indicates that individuals in poverty set lower aspirations. Based on the conflicting views of previous research, it is not clear whether less enfranchised individuals are likely to set higher or lower goals, or if they fail to set goals altogether.

This research looks at the act of setting goals—whether individuals set them or not, and whether they set goals that they think will make them significantly better-off or marginally better-off if achieved. Will increasing individual economic enfranchisement increase the likelihood of setting high financial goals?

3.2. Theoretical Model

The concept of the effect of economic enfranchisement on goal setting can be illustrated with the following utility function:

(1) $${\rm{U}} = \left( {1 + {\rm{g}}\left( {{\rm{I}},\,{\rm{E}},\omega } \right)} \right){{\rm{U}}_{\rm{0}}}$$

where U ₀ denotes an individual’s initial level of utility, and g denotes a goal as a function of income (I), economic enfranchisement (E), and a set of personal characteristics ω. The literature on goals, particularly Heath, Larrick, and Wu (Reference Heath, Larrick and Wu1999), has established that when an individual sets a goal, it creates a reference point (the desired outcome) that is above one’s initial utility. Therefore, if g is greater than or equal to zero, (1 + g) is positive, and

(2) $$\left( {1 + {\rm{g}}} \right){{\rm{U}}_0} \ge {{\rm{U}}_{0.}}$$

It then follows that g(I, E, ω) ≥ 0. The functional form of U = (1 + g) U ₀ follows from the model of aspirations by Dalton, Ghosal, and Mani (Reference Dalton, Ghosal and Mani2016). While that model considered effort toward a goal rather than the magnitude of the goal itself, the functional form illustrates how an individual sets a goal. If g = 0 (a goal is not set), then U = U ₀. In other words, the individuals do not seek to increase their utility in this way. On the other hand, if a goal is set, then U > U _0.

It has been established in the literature that income increases utility (Diener et al., Reference Diener, Sandvik, Seidlitz and Diener1993; Easterlin, Reference Easterlin1995); ${dU \over dI}$ > 0. The effect of economic enfranchisement E on goals has not been studied. We hypothesize that ${dg \over dE}$ > 0; in other words, increasing economic enfranchisement increases goals; if the magnitude of E increases, the individual is more likely to set a goal (g > 0), and the magnitude, or strength, of the goal increases with E.