Household Finance

Abstract

The study of household finance is challenging because household behavior is difficult to measure, and households face constraints not captured by textbook models. Evidence on participation, diversification, and mortgage refinancing suggests that many households invest effectively, but a minority make significant mistakes. This minority appears to be poorer and less well educated than the majority of more successful investors. There is some evidence that households understand their own limitations and avoid financial strategies for which they feel unqualified. Some financial products involve a cross-subsidy from naive to sophisticated households, and this can inhibit welfare-improving financial innovation.A PRESIDENTIAL ADDRESS IS A PRIVILEGED OPPORTUNITY to ask questions without answering them, and to suggest answers without proving them. I use this opportunity to explore a field, household finance, that has attracted much recent interest but still lacks definition and status within our profession. Teaching and research are presently organized primarily around the traditional fields of asset pricing and corporate finance. Economists in the former field ask how asset prices are determined in capital markets and how average asset returns ref lect risk. Economists in the latter field ask how business enterprises use financial instruments to further the interests of their owners, and in particular to resolve agency problems.By analogy with corporate finance, household finance asks how households use financial instruments to attain their objectives. Household financial problems have many special features that give the field its character. Households must plan over long but finite horizons; they have important nontraded assets, notably their human capital; they hold illiquid assets, notably housing; they face constraints on their ability to borrow; and they are subject to complex taxation.

Who takes Risks When and Why: Determinants of Changes in Investor Risk Taking*

“…European Council (2004 and2006) requires investment firms to obtain -information as is necessary for the firm to understand the essential facts about the customer (Article 35, 1)‖ and to elicit the customers' -preferences regarding risk taking, his risk profile, and the purpose of the investment (Article 35, 4).‖ However, MiFID provides no guidelines about how or how often investment advisors need to elicit risk preferences and risk profiles, and what -essential facts about the customer‖ should be collected. To close this gap, our study examines how best to assess risk attitudes and risk and return expectations, whether risk attitudes and/or risk or return expectations of investors change over time, and which of these changes impact risk taking.…”

“…Consumer finance has recently been identified as a field vastly understudied given its importance to the national and international economy (Campbell et al, 2011;Campbell, 2006;Tufano, 2009), at least in part because the economic transactions of individuals and households are hard to observe and interpret with traditional economic methods. As a result, psychologists and behavioral economists start using panel data, where representative sets of respondents answer questions about their values, beliefs, and expectations 1 , which (together with socioeconomic variables) can then be related to their hypothetical or real choices.…”

Does Financial Literacy Moderate the Relationship among Demographic Characteristics and Financial Risk Tolerance? Evidence from Egypt

“…Moreover, Grable (2016) pointed to risk tolerance as an underlying factor within financial planning models and investment suitability analyses . Campbell, (2006) also clarified that risk tolerance can influence individual behavior in situations such as savings, borrowing, type of mortgage and management of credit cards.…”

Macroeconomic factors influence on mortgage interest rate type demand

“…High inflation variation encourages short-term interest rate choice as one-side bet against inflation become "extremely expensive" (Campbell, 2012, p. 6). Differential between short-term and long-term interest rate was also analyzed as an indicator (Campbell, 2006;Vickery, 2007). Empirical studies confirm that if the general interest level is relatively high, borrowers also prefer shortterm interest rate due to the mean-reversal expectations.…”