"Household Finance: An Introduction to Individual Financial Behavior is about how individuals make financial decisions, and how these financial decisions contribute to and detract from their well-being. What sort of decisions am I talking about? We all must manage our money, shifting our resources across time. Sometimes we need to consume more than is currently available to us. For example, people commonly borrow to purchase residential real estate, paying down their mortgage loans over time. At other times, we have excess funds that we can save and invest. The main reason to accumulate wealth is to amass a fund that we can draw down when older and less able and willing to earn labor income. It is crucial, then, that our savings be sufficient to ensure acomfortable retirement. It is not enough to save; our savings must be invested appropriately so as to properly counterbalance risk and return. One way is to buy low-cost mutual funds or exchange-traded funds where the job of diversification is done for us. Some of us, however, purchase not only investment funds but also individual securities that we ourselves select. If so, it is vital that we avoid preventable errors. And, along the way, since the world is unpredictable, it is appropriate to protect ourselves by insuring against the sort of catastrophic loss that can derail our best-laid financial plans"--
Household Finance: An Introduction to Individual Financial Behavior speaks to both how people should and how people actually do make financial decisions, and how these financial decisions contribute to and detract from their well-being. Households must plan over long but finite horizons, have important nontraded assets, notably human capital; hold illiquid assets, particularly housing; face constraints on the ability to borrow; and are subject to complex taxation. Some households manage these goals and challenges independently, while still others delegate portfolio management. Household financial problems have many special features that differ from firms, investors, or the functioning of markets.
Author Richard Deaves covers the broad range of choices and goals in household finance both in the normative sense (i.e., what is best) based on conventional financial theory and in the positive sense (i.e., what is actually done) based on observing actual behavior. While modern finance builds models of behavior and markets based on strong assumptions such as the rationality of decision-makers, behavioral finance is based on the view that sometimes people behave in a less-than-fully-rational fashion when making financial decisions. Deaves addresses important issues and puzzles in the field such as financial illiteracy, whether education and advice can improve outcomes, intertemporal consumption optimization, consumption smoothing, optimal dynamic risk-taking, the stock market participation puzzle, the credit card debt puzzle, anomalous insurance decisions, mortgage choices, skewness preference, investments driven by availability and attention, local and home bias, the disposition effect, optimal pension design and improving outcomes through nudging in a thoroughly international approach.
There are many financial decisions that we all must make during our lives, such as how much to save from income
on a regular basis in order to fund a comfortable retirement; when insurance and credit are judicious (and when
they should be avoided); how much risk to assume in our investment portfolios; what investment mistakes should
we try to avoid when we invest on our own and when it might be sensible to delegate our investments. These
decisions and the toolkit to approach them fall under the rubric of household finance. This book, the first broad
but accessible treatment of household finance, addresses them in a systematic but entertaining fashion.
