Household Finance



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    • Department of Economics, Harvard University and NBER. This paper was delivered as the Presidential Address to the American Finance Association on January 7, 2006. It reflects the intellectual contributions of colleagues, coauthors, and students too numerous to thank individually. I would like to acknowledge, however, the special influence of my dissertation advisers at Yale, Robert Shiller and the late James Tobin, and comments received from Robert Barro, Dan Bergstresser, Steve Cecchetti, Karine de Medeiros, Xavier Gabaix, Michael Haliassos, David Laibson, Anna Lusardi, Greg Mankiw, James Poterba, Tarun Ramadorai, Robert Shiller, Andrei Shleifer, Nick Souleles, Jeremy Stein, Sam Thompson, Luis Viceira, Tuomo Vuolteenaho, Moto Yogo, Luigi Zingales, and seminar participants at Harvard. I am grateful to Laurent Calvet and Paolo Sodini for allowing me to draw on our joint research in Section III. Allie Schwartz provided able research assistance for Sections II and IV. This material is based upon work supported by the National Science Foundation under Grant No. 0214061.


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.