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. Financial decision makers must plan, save, take on an appropriate amount of risk, insure assets when needed, handle debt appropriately, and invest, either on their own or through delegating portfolio management. These and other decisions are covered, 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 behavior. Household finance thus covers both modern finance and behavioral finance at the level of the household decision-making unit. 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. Important puzzles and issues are addressed, 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.
