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Noah Smith

Unsteady Paychecks Are Making Americans Anxious

Stable earnings are increasingly a thing of the past. Income swings are hard on everyone, but especially the poor.

The up tends to be better than the downs.

The up tends to be better than the downs.

Photographer: Don Bartletti/Los Angeles Times/Getty Images

In finance theory, it’s usually assumed that people care not just about how much wealth they have, but about how much their wealth is likely to fluctuate year to year. For example, many finance professors will teach the concept of mean-variance utility, meaning that people weigh the amount their bank account goes up on average with the amount that it randomly bounces around.

This partly explains why risk is bad. At some point, you’ll have to take money out of your account. Maybe you’ll need to pay for something, like your son’s wedding, or your daughter’s college education, or a big medical bill. If nothing else, you’ll eventually retire and have to sell at least some of your investments. In other words, risk is bad because of liquidity needs — those incidents of life that force you to cash out.