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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.
List of contents
- INTRODUCTION: BEHAVIOR
- CHAPTER 1: ECONOMICS
- CHAPTER 2: PSYCHOLOGY
- CHAPTER 3: TIME
- CHAPTER 4: RISK
- CHAPTER 5: LOSS
- CHAPTER 6: PLANNERS
- CHAPTER 7: SAVERS
- CHAPTER 8: ALLOCATORS
- CHAPTER 9: RISK TAKERS
- CHAPTER 10: HEDGERS
- CHAPTER 11: DEBTORS
- CHAPTER 12: INVESTORS
- CHAPTER 13: PERFORMERS
- CHAPTER 14: DELEGATORS
- CHAPTER 15: FOLLOWERS
- CHAPTER 16: CONCLUSION: LESSONS LEARNED
About the author
Richard Deaves is professor emeritus of Finance at the DeGroote School of Business, McMaster University,
Hamilton, Canada. Elsewhere, he has addressed groups of students and executives at various universities in
Canada, the U.S., South America, Europe and the Far East. His research has been published extensively, appearing
in such prestigious journals as the Journal of Financial and Quantitative Analysis, the Review of Finance, the
Journal of Monetary Economics and the Journal of Banking and Finance. Most of his recent research deals with
issues in household, behavioral and experimental finance. He has also published on such issues as the performance of investment funds; market efficiency; modeling interest rates; and pricing, efficiency and hedging
in futures markets. His consulting experience has spanned such topics as investor behavior; pension design; hedging in the energy industry; the predictability of interest rates; real options and capital budgeting; and security valuation. He
has served as an expert in numerous regulatory and legal proceedings. His work has been profiled in such international media outlets as CNN, Newsweek and Der Spiegel. He has also been affiliated with the Centre for
European Economic Research (ZEW) in Mannheim, Germany.
Summary
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.
Additional text
“Richard Deaves provides an entertaining and thorough introduction to individual financial decisionmaking. It a hybrid between a business guide, a textbook and an academic review. I highly recommend it to any readers interested in conceptual and practical aspects of household finance and behavioral finance.” Brian Kluger, University of Cincinnati
