Household Finance

72 Pages Posted: 18 May 2006 Last revised: 13 Sep 2010

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 2006

Abstract

The welfare benefits of financial markets depend in large part on how effectively households use these markets. The study of household finance is challenging because household behavior is difficult to measure accurately, and because households face constraints that are not captured by textbook models, including fixed costs, uninsurable income risk, borrowing constraints, and contracts that are non-neutral with respect to inflation. Evidence on participation, diversification, and the exercise ofmortgage refinancing options suggests that many households are reasonably effective investors, 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 try to avoid financial strategies that require them to make decisions they do not feel qualified to make. Some financial products involve a cross-subsidy from naive households tosophisticated households, and this can inhibit the emergence of products that would promote effective financial decision making by households.

Suggested Citation

Campbell, John Y., Household Finance (April 2006). NBER Working Paper No. w12149. Available at SSRN: https://ssrn.com/abstract=896221

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

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