Working Paper: NBER ID: w12149
Authors: John Y. Campbell
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 of \nmortgage 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 to \nsophisticated households, and this can inhibit the emergence of products that would promote effective financial decision making by households.
Keywords: household finance; financial markets; investment behavior
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Household constraints (D10) | Suboptimal investment behavior (G11) |
| Socio-economic status (P36) | Effectiveness of financial decision-making (G11) |
| Naive households (D19) | Availability of financial products (G29) |
| Financial education (G53) | Investment outcomes (G11) |