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Further

Consumer Finance
Peter Tufano
Harvard Business School, National Bureau of Economic Research, and Doorways to Dreams Fund, Inc. Boston, Massachusetts 02163; email: ptufano@hbs.edu

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Annu. Rev. Fin. Econ. 2009.1:227-247. Downloaded from arjournals.annualreviews.org by Indian Institute of Technology - New Delhi on 08/22/10. For personal use only.

Annu. Rev. Financ. Econ. 2009. 1:227–47 First published online as a Review in Advance on August 28, 2009 The Annual Review of Financial Economics is online at financial.annualreviews.org This article’s doi: 10.1146/annurev.financial.050808.114457 Copyright © 2009 by Annual Reviews. All rights reserved 1941-1367/09/1205-0227$20.00

Key words
household finance, personal finance, consumer behavior, behavioral economics, behavioral finance, retail financial institutions, functional perspective

Abstract
Although consumer finance is a substantial element of the economy, it has had a smaller footprint within financial economics. In this review, I suggest a functional definition of the subfield of consumer finance, focusing on four key functions: payments, risk management, moving funds from today to tomorrow (saving/ investing), and from tomorrow to today (borrowing). I provide data showing the economic importance of consumer finance in the American economy. I propose a historical explanation for its relative lack of attention by financial economists and in business school curricula based on historic geographic and gender splits between business and consumer studies. I review the literature in consumer finance, organized by its focus on the consumer, financial institutions, and the government. This work is spread out between economics, marketing, psychology, sociology, technology, and public policy. Finally, I suggest a number of open research questions.

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INTRODUCTION
In teaching about financial intermediation, educators often draw two sets of circles on either side of the blackboard, with a box between them. The circles represent a mix of companies, governments, and households, either using or supplying funds. The central box represents intermediaries through which funds flow. Although this generic representation acknowledges the broad range of actors in the financial system, the boundaries of financial economics research are somewhat narrower. Using Journal of Economic Literature (JEL) codes as markers (see http://www.aeaweb.org/jel/guide/jel.php), the field of financial economics (G) contains only three subspecialties: general financial markets (G1), financial institutions and services (G2), and corporate finance and governance (G3). Finance e-journals in the prolific Social Science Research Network (SSRN) are similarly organized. In general, although financial economics focuses on one class of users of the financial system (companies), and calls our attention to the importance of intermediaries1, our field largely fails to formally address one of our other major circles on the board. The household sector is not explicitly a defined subfield within financial economics.2 The events of the past few years, however, should make it quite clear that the financial products offered to households, the financial decisions they make, and their relationship to financial markets have profound effects on the economy. Product innovation, new distribution channels, and other factors led to over-leverage in the consumer sector, in turn giving rise to cataclysmic shifts in the financial world. This alone is a testament that consumer finances cannot and should not be ignored. In this chapter, I suggest that consumer finance is an important but somewhat neglected—or more accurately, dispersed—subfield within financial economics. I echo and elaborate on the theme laid out by John Campbell (2006) in his Presidential Address to the American Finance Association (AFA): “[H]ousehold finance. . . has attracted much recent interest, but still lacks definition and status within our profession.” To his point, I propose a definition of the subfield; provide a provocative interpretation of the history, which seems to have led to its apparent low status within financial economics; summarize some of the key strands from the diverse literature; and suggest a series of research puzzles, which seem particularly important in the current times. Complementing Campbell’s address, which pointedly dealt with long-run investing decisions and mortgage decisions, I focus on consumer credit, payment, risk, and savings decisions. All readers of this review are advised to read it in conjunction with Campbell’s article, as well as some of the other survey pieces of related fields that I cite throughout the chapter.

JEL: Journal of Economic Literature

Annu. Rev. Fin. Econ. 2009.1:227-247. Downloaded from arjournals.annualreviews.org by Indian Institute of Technology - New Delhi on 08/22/10. For personal use only.

AFA: American Finance Association

A FUNCTIONAL DEFINITION OF CONSUMER FINANCE
What is consumer (or household) finance? Campbell (2006, p. 1553) argues that household finance “asks how households use financial instruments to attain their objectives.”
1

In his 2001 AFA Presidential Address, Franklin Allen lamented that financial institutions get little attention in financial economics due to the neoclassical view that institutions do not matter (Allen 2001). As evidence of this phenomenon, he noted that the millennial edition of the Journal of Finance had surveys on many parts of the field, but not on financial intermediaries. I might add that it also did not include a discussion of consumer finance topics. Public economics, although not part of financial economics, has its own category at the same rank in JEL codes (H). The economics of households is only considered as a subtopic of microeconomics (D1: Household Behavior and Family Economics). Furthermore, life cycle consumption and portfolio selection, which are part of household finance, are categorized in E21 and G11.

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g. a more expansive definition of the field might be as follows: Consumer finance is the study of how institutions provide goods and services to satisfy the financial functions of households. online businesses. money and post offices). postal and private money orders. and government safety nets. and the infrastructure that supports all of these activities. put options to protect one’s portfolio against declines). and payday loans). Automated Clearing House (ACH) transactions.. and how government action affects the provision of financial services. social networks. level and type of risk borne by the investor. and others. Fin. we can look at the adoption of various financial products. precautionary savings. data processors. and through various hybrid organizations (e.org  Annu. SCF: Survey of Consumer Finances Consumer Finance 229 . These functions are stable.  Advancing funds from the future to today... debit cards (including prepaid). banking overdraft protection.. For personal use only. These products are delivered by a host of organizations. Rev. In addition to explicit borrowing. However. person-to-person lending). In the consumer sector.  Advancing funds from today until a later date. which holds that financial systems are best understood in terms of the functions they deliver. most of the existing literature on consumer financial decisions is focused on the saving and investing functions. I adopt the functional approach of Crane et al.. businesses. risks are managed through credit scoring models and credit risk practices. To further clarify my proposed definition. person-to-person lending Web sites). barter.1:227-247. nonbanks (e.g. how consumers make financial decisions. mortgage loans. 2009. tax treatment. The provision of credit can take place through the formal sector. implicit borrowing is built into various derivative products. the purchase of certain financial products (e. Arguably. mutual funds. wire transfers. check cashing stores). Using data tabulated from the 2007 Survey of Consumer Finances (SCF) www. the payments function would include cash.annualreviews. as well as by assembling a diversified portfolio or securing insurance against default...g. online funds transfer tools like PayPal.New Delhi on 08/22/10. credit cards. workplace retirement programs. disability). through the informal sector (e. and Social Security. to longer-term unsecured borrowing (e.g. variable annuities.. including insurance (health.g. The organizations that perform this function range from the family and local community to insurance companies and government disaster relief plans. including options and forwards. I identify four primary and necessary functions of the consumer finance sector:  Moving funds.org by Indian Institute of Technology .g.  Managing risk. Econ. even though they may be delivered by a wide variety of institutions and through a wide range of products. banking organizations. remittances. rent-to-own schemes). The financial system must provide a mechanism for the transfers of money and payments for goods and services. property and casualty. The definition is admittedly tautological as it refers to undefined financial functions. including the government (e. From the perspective of businesses that serve consumers. credit and charge cards. and regulators. These products vary based on the intended time horizon. To understand the ubiquity of these functions. Downloaded from arjournals. friends and family). as well as prepaid structures (e. (1995) and Merton & Bodie (1995). and margin loans). The investing or savings functions are embodied in a host of products and services. which ranges from shorter-term unsecured borrowing (e.g. to secured borrowing (e. life.g. auto loans. student loans. payroll systems.annualreviews. checks.g.. This function is embodied in household credit. including bank products (savings accounts and CDs). and other factors. The risk-management function is satisfied through a variety of products and services.Recognizing the roles of households.

allow investors to buy shares in a pool. as well as by establishing guidelines for behavior embodied in the legal system. both groups use the threat of litigation both to forestall incentive conflicts and to redress them.flexfs. and professional management and administration.New Delhi on 08/22/10.. and advice delivered by a person’s social networks. or delegate these choices to others. and move funds backward and forward in time.g. for example. The insurance statistics come from industry sources [http://www. Government policies often attempt to improve the process of decision making by setting disclosure requirements. A fiduciary’s duty of loyalty is intended to establish norms for behavior between certain providers of financial goods and services and their customers. 2009. as well as through the structure of both explicit contracts and implicit arrangements in social networks. financial advisors.  Providing financial information to facilitate decision making. For example.4 Seventy-seven percent of households report having debt (of any kind). policy concerns often focus on the fraction of Americans in the most precarious financial situations—particularly those without savings or health insurance. Consumers can make decisions by themselves.(http://www. parties contract with one another formally or informally.html). news from the financial press. more than 90% of Americans have a transaction (checking) account. such as brokers. the legal concept of fiduciary duty was established by society to preemptively address incentive conflicts.org by Indian Institute of Technology . To deliver payment services. or bank trust departments. In addition. Having multiple parties involved leads to potential conflicts of interest. Generally speaking. Consumers gather information and make financial decisions with the help of formal and informal financial education. (2005). Fin.gov/pubs/oss/oss2/2007/scf2007home. a financial system must also deliver a set of ancillary functions:  Pooling. see Gerdes et al. 230 Tufano . giving them access to economies of scale.annualreviews.federalreserve. check cashers. Econ. but often three.1:227-247.  Dealing with information asymmetries and incentive conflicts.cbpp.htm and http://www. For personal use only. manage risk.3 Approximately 94% report owning some sort of financial assets and more than 80% have two particular forms of risk protection: health and life insurance. Pooling is also exemplified through securitization. Businesses use a similar set of tools. and is present in most borrowing and lending transactions (Sirri & Tufano 1995). Small transactions (assets or liabilities) can be combined to create portfolios that facilitate economies or diversification. The remainder presumably use some combination of cash or alternative payment systems (e. as well as through all intermediated businesses. disclosures mandated by government bodies.com/pdf/LIMRAfactsaboutlife2005complete%20(2).pdf]. money orders). which each party—as well as government—seeks to mitigate. Downloaded from arjournals. Consumers address conflicts with others when selecting the firms and people with whom they do business. 3 4 For information on the shift from checks to electronic payments. advice from brokers and advisors. The SCF data represent weighted fractions of respondents with these products. In all consumer businesses. at least two. Governments play a key role in incentive conflicts by regulating certain actions. as well as those mechanisms that lead to better decisions. The current interest in behavioral finance deals primarily with the quality of household-level decision making. marketing activities of product vendors. diversification benefits. such as the Truth in Lending Act (TILA) and associated Regulation Z that specify how annual percentage rates (APRs) must be calculated and reported so that consumers can make informed decisions.org/8-29-06health. or with inadequate levels of both. Mutual funds. Rev. namely Annu.

It has a second benefit. data to illustrate various points. People who want to borrow money do not necessarily begin with a single product (e. and a single function may be delivered by a host of seemingly unrelated institutions or products. and resolve information asymmetries and incentive conflicts.2 trillion) of these funds held in tangible assets (mostly real estate) and $40.3 trillion in financial assets.. Nonprofits account for 5-7% of assets and liabilities. In short. 7 Technically. as the two are considered a single sector in the Flow of Fund calculations due to data limitations. a credit card) or even a single institution (e. but to use a consistent set of data. payment products. the household sector dominates the corporate sector.5 trillion. Annu.g.g. Rather..New Delhi on 08/22/10.annualreviews. According to the latest numbers available as of this writing (2009 Q1).1:227-247. Yet in sheer size. Econ. such as the credit card.. For personal use only. For example. They also provide pooling. Downloaded from arjournals.that the provider acts in the best interest of the customer. THE SCALE OF CONSUMER FINANCE With such an expansive definition. For example.6 The Federal Reserve’s Flow of Funds data are a commonly used source for aggregate statistics (http://www. These more traditional approaches must contend with the fact that a single product or institution delivers many different functions.3 trillion in 5 Large strands of the financial economics literature are concerned with these conflicts. Although one can study banks or credit cards alone. or differences in institutional conventions across jurisdictions or over time. Corporate (nonfarm. one can get a sense of the magnitude of the consumer finance sector as a driver of the economy. as well as information (advice or marketing). too. such as their social networks. in that it forces one to have a user-oriented focus on the financial system. Therefore. Corporations are central to financial economics.5 trillion) and consumer credit ($2. and may also consider informal institutions.5 The functional approach to defining consumer finance can be contrasted with a product or institutional approach. primarily in credit cards). businesses produce goods and services. not to suggest that consumer finance activities are less important elsewhere.5% ($24. loan insurance).S. and even some risk-management products (i.1 trillion in liabilities.5 trillion in assets. Fin. lending products. A functional approach best ensures that our analysis is not constrained by artificial boundaries imposed by traditional product categories. www. potential incentive conflicts exist in the delivery of nearly all financial functions. In aggregate. they will look across a variety of formal financial institutions.gov/releases/z1/). thus the figures largely reflect the household sector (see Teplin 2001). Another single institution may deliver a form of all of the financial functions. but also providing payment services by delivering funds to merchants. provides multiple functions as well—not only extending credit.org  Consumer Finance 231 . Using the United States as an example. the classic book by Berle & Means (1991 [1932]) examines the implications of the separation between ownership and control. mostly home mortgages ($10. with 37.federalreserve. A single product.e. a bank or credit union often will offer savings products. it should be clear that consumer finance is a substantial element of the financial sector. 6 Throughout the review. taking a functional approach to understanding consumer finance serves researchers well. this information refers to households and nonprofit organizations. households held $14. Bank of America).org by Indian Institute of Technology . Surely. and provide employment. 2009. I use U.annualreviews. an institution focus runs the risk of confusing or conflating the various functions and may miss relevant competitors and alternative providers. nonfinancial) businesses held only $27. households7 held $64. Rev.

Visa and MasterCard.Annu. Why? A SPECULATIVE HISTORY OF SCIENCE: THE SPLIT OF CONSUMER STUDIES FROM BUSINESS STUDIES Every one of the top 20 U. Some finance academics argue that the field of finance is defined by whether the activity affects asset prices. commercial paper.2 trillion. Rising home values.New Delhi on 08/22/10.visa. readers are referred to Shiller (2008) for a concise summary. For example. with combined transaction volume of $6. Their debt is approximately one-half that of households. poor business practices.9 Now.corporate. it has a remarkably small footprint in both.10 When addressed. our hopes for the recovery in part hinge on the rate of consumer borrowing and spending. new mortgage products.mastercardintl. which is also shown in the figure. Curiously. 9 10 These two courses were both introduced in 2008–2009. Even by this narrow definition. using program Web sites and online catalogs. Figure 1 (see color insert) represents time series trends for consumer leverage in the United States over the past five decades. leading to foreclosures that rippled from the subprime space through CDOs and insurers to contribute to the demise of financial institutions. Increasing debt was associated with high levels of consumer spending and low levels of saving. one was undoubtedly the subprime mortgage market. Although there are many explanations of the phenomena.3 trillion in liabilities. and poor consumer decision making all combined to produce over-leverage in the consumer sector.1:227-247. MBA programs offers at least one course on corporate finance. 2009. Although there are many precipitating events that contributed to the current economic crisis.8 Recent economic events have demonstrated the importance of the consumer sector to the economy. however. low interest rates.com/phoenix. consumer finance deserves a prominent place in the field of financial economics and in business schools. with credit market instruments (including bank debt. federal policies to encourage homeownership. 232 Tufano . Information on the course offerings at the top 20 MBA programs (as ranked by Business Week and U. For personal use only. Downloaded from arjournals. Rev. and mortgages) accounting for $7.annualreviews.zhtml?c=148835&p=irol-reportsannual (data as of December 2008). corporate bonds. and as Campbell notes. assets. roughly equally split between tangible and financial assets. with the rest being shortterm liabilities. News and World Report) was gathered online in September of 2008. some of which are changing very rapidly. securitization. Just one part of that payments function—credit and debit cards—represents trillions of dollars of annual activity.com/av/pdf/Visa_Corporate_Overview. The payments systems used by consumers move trillions of dollars through the economy.8 trillion. consumer finance typically is an ancillary component of related offerings. Econ. using different leverage measures.org by Indian Institute of Technology . as of 2008 only two MBA programs offer explicit courses on consumer or household finance. report more than 75 billion transactions a year.pdf (data as of September 2008) and http://investorrelations. Fin. Balance sheet numbers alone do not capture the magnitude of the consumer finance sector. Figures represent all card transactions worldwide. Subsequent softening in housing prices exposed the over-leverage. but a review of their course descriptions and the leading textbooks suggests that consumer-facing businesses and households account for relatively little of the 8 See http://www.S. courses on banking and financial institutions are offered by 14 schools.S. such as payables. the two largest card associations. Corporations hold $13. so their financial asset holdings are approximately one-third that of households. suffers from lack of status.

annualreviews. regulation. Why does consumer finance receive so little attention in business schools and mainstream economics departments? One possibility is that consumer finance is so inherently multidisciplinary that it falls between the cracks. (The traditional sequence discusses money and interest rates. thought to be “not merely demeaning. but possibly corrupting” (Daniel 1998. but most focus solely on investing decisions. what has held us back from addressing these limitations while plowing forward on hard problems in other areas? The neglect of consumer finance in business schools is particularly puzzling because of the substantial profit opportunities available in this sector. personal taxation.content.12 This intellectual divide can be traced to the 1800s. data are restricted by privacy considerations.) Behavioral finance courses are offered at seven programs. there is another hypothesis for this inattention and the low status granted to consumer finance. sociology. 28). divorced from mainstream economics and business. It may be that our current state of research and teaching reflects a century-old split that left consumer and business topics separated by gender and geography. In essence. yet it also applies to many other parts of academia. Campbell’s diagnosis is correct. Details were gathered online in December of 2008 using program web sites and online catalogs. 1558).rankingsandreviews. and surveys are inherently suspect. Industrialization and urbanization were changing the American way of life and causing many to fear the demise of the traditional moral fabric (Brown 1985). For personal use only.usnews. There are few data on transactions.11 Nine graduate programs offer behavioral economics courses.S. Second. 12 www. The top 20 economics graduate programs all offer courses on microeconomics that deal with the decisions of representative consumers. These complications include the complex math of intertemporal models. industrial organization. it is hard to observe and measure household activity.1:227-247.org by Indian Institute of Technology . p. In response. However. 2009. Elite urban universities emphasized businesses and prepared men to lead them.org  Consumer Finance 233 . Downloaded from arjournals. News and World Report 2008 ranking (http://grad-schools. and residential real estate. rural land-grant universities studied households and prepared women to lead them. and to consider the decision-making process primarily in the context of investing decisions. Campbell suggests that the problem may lie in two difficulties encountered by would-be researchers. Fin. Economics departments likewise spend relatively little class time on consumer finance issues. then describes the various institutions. and the management of the institutions. The blame for these changes often was placed on commerce. such as microfinance. The top 20 graduate programs in economics were identified based on the U.New Delhi on 08/22/10. and the law. I thank Andrea Ryan for bringing her sociological perspective to this section. First. not the full range of consumer financial decisions. but these courses tend to examine the consumer in isolation from business or regulation. Focusing primarily on the finance and economics communities. p. Other related courses have six or fewer offerings. Rev.annualreviews. This emerging philosophy 11 Annu. and still is. the study of consumers’ financial needs was subsumed under the field of home economics or consumer science.com/grad/eco/search). consumer finance requires an understanding of not only finance and economics but also psychology. As this review makes clear. the need to model nontradable human capital and illiquid housing. Econ. and the Byzantine nature of personal taxation. The question is. which was. he argues that “household decision problems involve many complications that are neglected by standard textbooks” (Campbell 2006. there became an increasing urgency to recast the status of the businessman from profit-seeker to professional (Khurana 2007).

and the first graduate business program at Harvard. continues to reflect their history. consumer education. not in business schools or economics departments. For personal use only. Econ. and especially men. The list—unfamiliar to most financial economists—includes the Journal of Consumer Affairs. comprised nearly exclusively of men. resource management. comprised nearly exclusively of women. each woman’s civic duty was to ensure that her home was well cared for.. A Web search was conducted in December 2008 using the AFA’s online directory. In contrast. A perusal of a recent consumer science research compendium (Xiao 2007) shows that the topics of interest are similar to those approaching the field from backgrounds in financial economics. faculty gender was not readily discernable by forename.annualreviews. comprising 62% of faculty in 13 Annu. and their journals are quite separate. commerce). develop. the ratio of men to women faculty members in these respective programs. The homemaker was a manager of one portion of the economy—the place where everyone. having come about under the 1862 Morrill Act and its call for practical education in “agriculture and the mechanic arts” (Stage & Vincenti 1997). Family and Consumer Sciences Research Journal. to this day. and the sociology and psychology of decision making to the study of the ways that individuals. which opened in 1888.was embodied in the missions of the first university-based business school. running smoothly. one academic profession. on businesses as part of the broader society (i. By the early twentieth century.” while they did their “social and municipal housekeeping” (Apple & Coleman 2003). then. Financial Counseling and Planning. The careful understanding of households—including their finances—was embraced by and grew as a result of rural land-grant colleges. Male faculty members comprise between 83% and 89% of finance departments at the top 20 business schools. Concerns about the decline of social order also highlighted the importance of maintaining order in the home. Downloaded from arjournals.1:227-247.14 In consumer science programs. and contributing to the larger community and society (Apple & Coleman 2003).13 Furthermore. the consumer). Fin. The 83% figure counts all individuals identified as “gender unknown” as women. families.e. Journal of Financial Planning. 2009. Rev. the Wharton School. as measured by membership in the AFA. 2007. International Journal of Consumer Studies. laid their heads and wallets each night.e.. Home economics emphasized not only nutrition and sanitation but also financial management. At the same time. Their conferences are distinct. Just as the men were to be both businessmen and civic stewards. 14 234 Tufano .org by Indian Institute of Technology . soon named home economics.New Delhi on 08/22/10. Scholars from these two worlds rarely interact. women dominate. 7). focused on household economics and management as part of the broader community (i. the study of businesses and the institutions that financed them were more typically found in urban business schools (Khurana 2007). and households acquire. In some cases. What we call consumer finance is most often studied in consumer science programs. Nearly a century later. as measured by their professional associations. which launched in 1908. These social conventions were soon reflected in academia. Often called personal finance. homemakers were charged with managing much of the “private economy. The tension between the increasing importance of managing the home and the opportunity to have a professional career gave rise to a new discipline. women were beginning to shed their role as strictly homemakers and to secure advanced education and develop professional careers. This application of science to domestic life took root in universities nationwide (Stage & Vincenti 1997). the other. and allocate monetary resources to meet their current and future financial needs” (Schuchardt et al. this discipline applies “principles of finance. and Journal of Family and Consumer Sciences. In essence. p. Financial Services Review. this schism still largely persists. The 89% represents the proportion of men given all “known” faculty genders.

With these risks in mind. this review is insufficient. Subsequent models have examined the implications of richer sets of portfolio choices. typically called personal finance or financial planning. until relatively recently academic models largely ignored bond holdings. A BRIEF TAXONOMY OF RESEARCH IN CONSUMER FINANCE Without a central home in business schools or economics departments. provides less elegant advice. Financial economists have built upon this solid foundation. in the recent revamping of the curriculum at the Yale School of Management. Wherever possible. www. Only five of the 10 departments were represented in the association’s higher education unit. Downloaded from arjournals. In most consumer science programs. Given the breadth of the field and related disciplines.the top 10 most active departments. I divide the studies by the primary decision maker considered by the work: the consumer. it provides high-level guidance for representative households. For personal use only.org  Consumer Finance 235 . how to evaluate insurance. consumer sciences. 1973) seminal work exemplifies normative research in this area. 2009. There is often a considerable gap between scholarly work and this advice. Beyond data limitations and modeling difficulties. Fin. Although based on simplified assumptions. For example. Rev. finance. or a combination of these players. With new interest in consumer finance.15 Land-grant universities continue to be a dominant force in this field. calculating an optimal portfolio given time-varying investment opportunities. For example. with wealth also held in the form of nontradable human capital and housing (see Campbell 2006 for an overview).1:227-247. and consumers more generally. the financial institution.New Delhi on 08/22/10. but is linked to actual products and services. perhaps this divide will be closed. the absence of the consumer from consideration by top business schools—and top universities—may reflect historic divides of gender and geography. personal financial management is a standard offering. how to manage credit card debt. psychology. studying the impact of shocks to real interest rates and the equity premium.annualreviews. and concluding that investors should hedge shocks to their wealth as well as to expected returns on that wealth. Econ. and 84% of the American Association of Family and Consumer Science’s Higher Education Unit. I cite survey pieces that cover portions of the field. The Consumer There is substantial normative and positive work on consumer financial decision making. Although the different groups are interested in similar phenomena. Annu. and there are many textbooks in this field. they approach them with different languages and tools. Another positive sign is the 2009 formation of a consumer finance working group at the National Bureau of Economic Research. sociology. One positive sign is that. Other normative work. etc. Merton’s (1971. These books cover topics such as how to set up a household budget. only faculty teaching consumer science courses in their division were counted.annualreviews. Wherever possible. academic research by Campbell & Viceira (2001) only recently reconciled the holding of bonds as 15 The top 10 most active departments were defined as a result of online research in September 2008.org by Indian Institute of Technology . the consumer was explicitly acknowledged as one of the core topics of study. and the law. research on consumer finance is disbursed among economics. although financial planners advise risk-adverse or older households to hold bonds. the government.

but are central to any consideration of retail financial services. and for real-world concerns to be incorporated into models. Mullainathan & Thaler (2001). psychologists have documented that this maxim is not always. personal finance advice is often less driven by research than by rules of thumb. how information is presented or organized). Taxes and bankruptcy are critical factors that explain corporate finance choices.annualreviews. The form of the utility function. Behavioral considerations have been incorporated into corporate finance only recently (see Baker 2009 in this volume).e. which marries insights from psychology and economics. and even the existence of a rational time-consistent decision maker are long studied but still unresolved research questions (see Campbell’s 2006 discussion). One of the earliest and most critical contributions to behavioral economics is Kahneman & Tversky’s (1979) and Tverskey & Kahneman’s (1991) concept of loss aversion. utility maximization and utility functions serve comparable purposes. 2009. behavioral considerations make evaluation of utility more complicated. the types of imperfections that make corporations’ decisions value-relevant also apply to household choices. economists would assume that more is generally preferable to less. including the notions that decisions relate to heuristics (i. but modeling household preferences is considerably more complicated than calculating NPVs. which spans positive and normative work. For personal use only. This stark conclusion set the stage for research into the relevant imperfections and their impacts. Subrahmanyam (2007). and cognitive biases (e. 236 .1:227-247. Continuing the analogy to corporate finance. Downloaded from arjournals. and the Merton portfolio model has been extended to include considerations of bankruptcy (for a review..e. see Sethi 1996). value maximization is employed as a standard objective function and the net present value (NPV) rule used to implement this rule. Likewise. Although this logic does not carry over neatly to consumer finance.NPV: net present value hedges against time-variation in interest rates.New Delhi on 08/22/10.. There is a large and growing field of behavioral economics or behavioral finance. as the wealthiest individuals are no happier than others (Ben-Sharar 2007). There are a number of key insights from behavioral economics. 2005). framing (i.. However. Translating a stream of consumption into utility is an extraordinarily subjective endeavor and even simple economic concepts are challenged. there is an extensive literature on the impact of personal taxation on household portfolio investment decisions (for a review. In consumer finance. The JEL codes’ placement of household economics under microeconomics reflects the interest in understanding utility and consumer demand. Because financial economics has not fully embraced consumer finance topics. Econ. Whereas calculation of NPV is fairly straightforward.g. Shefrin (2002). This gap suggests an opportunity to apply scientific methods to provide better advice. 1994. models consumer preferences. Rev. A second element of consumer-facing research. Modigliani & Miller’s (1958) and Miller & Modigliani’s (1961) seminal works demonstrated that many corporate finance decisions (e. financing and dividend policy) neither create nor destroy value in the absence of various imperfections. For surveys of this field and for an extended discussion of the implications for practice. The awarding of the Nobel Prize in Economics to Daniel Kahneman in 2002 reflects the acceptance of this approach by mainstream economics. nor perhaps even usually true. In corporate finance. see Poterba 2002). misestimation and overconfidence). it would require different discount rates for gains and losses.g.. and Thaler & Sunstein (2008).org by Indian Institute of Technology . Invoking free disposal. Thaler (1993. the parameters for the function. Fin. see DeBondt & Thaler (1995). Framed in NPV-like terms. whereby people evaluate gains and losses asymmetrically. rules of thumb). Tufano Annu.

A sociological approach to utility posits preferences in terms of levels relative to others. 2009) and many still unpublished (see Lehnert & Maki 2007. and the highest quintile holding portfolios of public equities. has been shown to explain various consumer time preferences (Laibson 1997). A positive strand of consumer-facing research studies the actual financial decisions taken by consumers. One of the key questions is how behavioral biases affect markets. Many of these studies report levels of financial market participation. Their 2004 findings were prescient. and also identifies the role that money and finances have in defining social groups (see Zelizer 1995 for an extended discussion of this subject). and a rising fraction of families with delinquent payments. A long stream of work on determinants of mutual fund flows examines how investors respond to past performance as salient but are less sensitive to losses (Chevalier & Ellison 1997. www. with less wealthy people largely holding safe assets and vehicles. a marked increase in debts relative to assets. Hilgert et al. Still others argue that there is no puzzle because the two are not substitutes and have different liquidity characteristics. Whereas most NPV models use constant discount rates. and Zinman 2007).org by Indian Institute of Technology . Gross & Souleles (2002) were among the first to document this latter fact. Ippolito 1989. Campbell (2006) discusses and references the literature on home mortgage choices. Sirri & Tufano 1998). Bucks et al. (2003) and Campbell et al. Fin.New Delhi on 08/22/10. Consumer Finance 237 . (2007) assess the welfare costs of household investing mistakes. Researchers explain this phenomenon as a strategic behavior related to imminent bankruptcy. with the SCF providing much of the raw data. Calvert et al. Quasi-hyperbolic discounting. Telyukova 2008. time-inconsistent discount rates.and might require these rates to be path dependent. Building on this. Downloaded from arjournals. real estate.annualreviews. Often. or the need for cash to pay for items that cannot be charged. Most of this positive literature seeks to relate these household choices to factors that include relative risks and prices of alternatives. Research on financial decision making often addresses how closely behavior reflects rational homo economicus versus a more behaviorally-challenged decision maker. financial knowledge. 2002) work on investing documents loss aversion and gender differences. Econ. (2006) provides a comprehensive summary of SCF findings as well as a comparison with the prior survey. household discount rates are likely nonconstant. In the mutual fund context. 2009. research identifies apparent anomalies. and banking practices.org  Annu. such as why households tend not to hold equities or why they borrow from high-cost credit cards while maintaining balances in low-yielding savings accounts. the middle class (thirtieth and fortieth percentiles) showing a pronounced propensity to hold real estate. behavioral decision-making biases. Barber & Odean’s (2001. community traits. Campbell’s (2006) survey begins with cross-sectional distributions of participation rates that illustrate how ownership of financial assets increases with wealth. Berk & Green (2004) conclude that return chasing can be socially optimal. Continuing to incorporate lessons from psychology and sociology will illuminate consumer financial decisions. They review the various theories for consumer saving and the empirical support for each. (2008) relate basic financial decisions to personal traits.annualreviews. Rev. A small but interesting subvein of this participation literature looks at the adoption of innovative retail financial products by consumers (see Frame & White 2004 for a review). in which forward rates for discounting vary wildly depending on the horizon. and shares in private businesses in roughly equal proportions. For personal use only. identifying strong appreciation of house values. a response to spousal self-control. An excellent example can be found in Browning & Lusardi’s (1996) comprehensive survey of consumer savings behavior. This literature is still evolving with some new publications (see Bertaut et al.1:227-247.

and the neoclassical view of financial institutions. financial knowledge. Economists have begun to venture beyond psychology to understand consumer financial decision making. such as financial risk taking. and notes the inconsistency between corporate finance. economically sustainable? For an example of this type of work.g. For a survey of the costs that investors bear searching for positive performance. Hilgert et al. management. rent-to-own stores. brokerage firms. However. a large and reasonably well-developed literature addresses the fundamental economics of retail investment management. Institutional work often is pigeonholed within academic departments or journals specializing in banking. affect and emotions. insurance firms. and choices of retail financial institutions and the implications for consumer well-being and social welfare. long understood in consumer sciences. studying whether certain mutual funds reliably deliver positive risk-adjusted returns (e. Rev. payday lenders. Institutions include depositories. mutual funds. manifesting a new-found interest in sociology and social networks. which ignores institutions and the conflicts. Allen’s (2001) AFA presidential address focuses on agency conflicts inherent in institutions’ relations with customers. Because household finance typically reflects decisions of multiple people together.g. Some research on retail financial institutions deals with their organization and economics. check cashers. 2009.. and networks of firms (e. as well as governments that sell money orders and social networks where members lend to one another. see French (2007). Carhart 1997). which acknowledges these conflicts. or real estate. Fin. Christoffersen & Musto (2002) and Gil-Bazo & Ruiz-Verdu (2006) find ´ evidence of strategic price setting by mutual funds. Studies have attempted to link this knowledge to savings behavior and financial participation (Bernheim 1998.1:227-247. For personal use only. they are linked in that they all attempt to address two fundamental questions: What decisions should and do consumers make? What should and can explain these choices? Financial Institutions Institution-facing work seeks to explain the organization. Although these approaches to understanding the consumer-facing perspective are varied. such as microfinance. Are there economies of scale and scope such as in banking or mutual funds? Can merging firms capture these gains? How does technological innovation change production functions? Which governance structures and incentive schemes produce higher shareholder performance or customer outcomes? Is a certain business model. This line of work highlights the broader issue of how retail financial institutions deal with their customers. where managers set fees to profit at the expense of less-alert customers.org by Indian Institute of Technology .New Delhi on 08/22/10. preferences.annualreviews.Annu. and a host of other factors. social and community norms. Camerer and colleagues’ (2005) accessible survey is a good introduction to this emergent field. to underlying biological factors. economists have begun to appreciate biology: Neuroeconomics attempts to explain decisions. insurance. this perspective. credit card associations). 2003) to retirement savings behavior (Lusardi & Mitchell 2007a. At a more fundamental level. Downloaded from arjournals. there is a growing body of work linking financial behaviors with financial skills and education (see Lusardi’s 2009 volume for a summary). the structure of financial products. Econ. For example. is explicable.. one question posed by performance studies was whether pre-fee over-performance (if any) was passed along to investors through higher post-fee returns or captured by the management company in the form of higher fees. Using this mutual fund work as a springboard. institutions also include peer-to-peer lenders. and pawn shops.b) and to over-indebtedness (Lusardi & Tufano 2008). 238 Tufano .

Levitt & Syverson (2008) study the real estate brokerage industry and find that brokers who sell their own property get higher prices than when they are selling someone else’s property.html#his). Legal scholars and economists have opined about the reasons for these duties and other rules. Econ. Bergstresser et al. 2008. but perhaps not in practice. Jackson (2009) discusses the general problem of conflicts of interest in consumer finance distribution channels.sec. incidence of bankruptcy. 2006. Securities and Exchange Commission 16 Rather than having specialized regulators.S. is investor protection.org  Consumer Finance 239 . as well as consumer protection issues raised by other studies naturally leads one to ponder the role of government.1:227-247. Downloaded from arjournals.html). consumer finance receives extra attention. researchers look at the relationship between the existence of payday lending and outcomes such as ability to withstand financial shocks. federal and state banking regulation is designed to protect consumer interests.000 different products with a staff of 420 people (http://www. For personal use only.org by Indian Institute of Technology .16 For example. Building off Caskey’s (1996) pioneering work on fringe banking.cpsc. Rev. Antitrust questions of this sort. and Skiba & Tobacman 2008). some consumer financial businesses are more closely overseen than other businesses. The SEC. closure of bank accounts for mismanagement. as well as how market forces may make them irrelevant. Securities and Exchange Commission (SEC) mission. Alternative financial institutions are gaining more attention as well. the Consumer Product Safety Commission oversees more than 15. For a SEC: U. sometimes thought to be understaffed. the alternatives against which they compete. often looking for evidence of misaligned incentives between principals and agents in consumer finance settings.gov/about/faq.gov/ federal. and when stronger rules and regulation are required. These debates revolve around circumstances in which caveat emptor—combined with disclosure and competition—is appropriate. Often.annualreviews. 2009.New Delhi on 08/22/10. many businesses have relatively lighter and shared oversight. Scholars studying financial institutions have focused on these conflicts. Other industries with specialized regulators charged with consumer protection include foods and drugs and transportation (http://www. Melzer 2008.gov/about/secpar/secpar2008. see Frankel 1998.S.Annu. and question whether brokers’ incentives are aligned with those of their customers. the U. The extensive body of industrial organization research on credit cards asks whether prices are set competitively and whether some parties are systematically benefited or harmed by the structure of the current two-sided market (Evans & Schmalensee 2005). www. (2009) examine broker-sold mutual funds and find that funds sold by brokers underperform those sold directly to the consumer. Similarly. has more than 3500 full-time staff (http://www. The Role of Government Although government plays an important role in regulating many parts of the economy.cpsc. (see working papers by Campbell et al. even before accounting for any distribution charges. 2008). A recent (still mostly unpublished) stream of work studies payday lenders. in part. Loyalty refers to putting the client’s interests ahead of those of the fiduciary. Fin. Beyond ensuring the system’s safety and soundness.pdf#sec1). etc.annualreviews. For example. In intent. and care refers to the requirement to use reasonable standards of diligence (for an extensive treatment of this topic. some financial institutions that are entrusted with the money of others sometimes owe fiduciary duties of loyalty and care. Morgan & Strain 2007. Morse 2008. questions about the relationship between firms and their customers relate to industry competitiveness. and whether the service they provide helps or harms their customers.

Ashraf and colleagues’ (2006) work on commitment savings demonstrates that making savings less liquid can increase the level of household savings. Karlan & Zinman 2008). A recent and important trend in consumer finance research is to use field experiments that not only engage multiple parties but also test the impact of interventions. 2003. Econ. Carroll et al. This proposal is one of the key elements of the Obama Administration’s reforms of the financial system. Multi-Party Field Interventions The taxonomy above categorizes research based on the relevant decision maker. This testing can be structured in standard control-treatment fashion or as randomized field experiments. 240 Tufano . and bans discrimination. (2008) including Hotchkiss & Parker (2008). Duflo and colleagues’ (2005) work on the incentive impacts of match funding measured the effect of increasing match rates on tax-advantaged savings. businesses. 2009. and has been rolled out by Vanguard in the United States and by AXA in Europe. Warren (2008a. the question is. and contributed to the IRS’s adoption of Form 8888 to simplify saving part of a refund.Annu. 1998) intervene in employment settings to demonstrate that automatic enrollment features can dramatically increase participation in workplace savings plans. but any study of consumer finance tends to involve multiple parties (consumers.1:227-247. Beverly and colleagues’ (2006) work on tax refunds demonstrated the potential of paying yourself first using tax refunds. Within consumer finance. Rev. why would the market not supply these benefits if consumers are willing to pay for them (Hynes & Posner 2002.New Delhi on 08/22/10. These issues engender strong debate. 2009a.org by Indian Institute of Technology . and others (Beshears et al. provides insurance against shocks. This work led to changes in the pension law to facilitate auto-enrollment programs.b.annualreviews. Tufano (2008) studies the offer of a simple savings product at tax time. Thaler & Benartzi’s (2004) Save More TomorrowTM (SMarT) experiment gave workers the ability to commit today to save part of their future salary increases. 2009. these studies apply behavioral economics to induce behavior changes. see Hynes & Posner (2002). review of this topic and the empirical work on consumer finance law. Zinman. Downloaded from arjournals. and others’ field experiments in South Africa disentangle moral hazard and adverse selection effects by borrowers and the implications of marketing (Bertrand et al. As Hynes & Posner’s summary makes clear. 197)? Coates & Hubbard (2007) argue that the workings of financial markets—competition among mutual funds and active movement of money by investors—make portions of the 1940 Investment Company Act irrelevant or moot. 2008. Madrian. 2004a. the law ensures that consumers have information. In a series of influential papers. 2009. For a summary of the current law. p. and implications for savings bond policy. However. Choi et al. For personal use only. Laibson. 2008. Laibson et al. Fin. Karlan. Metrick. see the volume by Lampe et al.b. Consumer finance is amenable to action research. offering laboratories that can generate meaningful samples to inform business practice and public policy. so-called “nudges” in Thaler & Sunstein’s (2008) language. and the government).b) argues that neither market forces nor existing regulation of retail financial transactions has been adequate and proposes a Financial Products Safety Commission to protect consumers against unsafe products. The taxonomy also does not differentiate by research method. For example. coauthors Choi. in which a treatment is administered randomly to members of the population to increase the power of the tests (see Harrison & List 2004 and the reviews in this volume of the Annual Review of Financial Economics for details on these methods).

If there are meaningful conflicts of interest between businesses and consumers.” Consumer finance studies these household managers and the financial choices they make. sociologists. an economy. the failure to carefully understand consumer financial decisions can lead to the problems of insufficient retirement savings. however. whether it is acting in the best interests of consumers and whether it can be delivered in a better way. Finally. as spending. and risk. The payment system has evolved from barter. oxen. I list some issues where future research might be able to learn from. In his economics textbook. This openness acknowledges that utility maximization is not a mechanical exercise. but rather that consumer decisions reflect behavioral biases.annualreviews. meaning “one who manages a household. Econ. and legal scholars who seek to understand household decision making. but requires substantial boundary spanning. affect. this sector is merely a convenient laboratory for studying other phenomena (e. regulations. laws.g. To understand the economic efficiency of the consumer finance sector. or depress. psychology. psychologists. saving. 2009. at the core of the subfield. The study of household payments. The emerging interest in the field represents a deeper openness by financial economists to insights from other disciplines. The law of one price holds that two things with the same payoffs will have the same value. and seashells to plastic cards and mobile banking (Evans & Schmalensee 2005). This review demonstrates the importance of consumer finance and the work of financial economists. and poorly designed mortgage products. or make good decisions. Conversely. also requires considerations of industrial organization. and managing risk functions is complicated. business practice and public policy below in the Future Issues section. information economics. The understanding of how consumers and businesses behave should inform policymakers. excess leverage. saving. Consumer finance must understand how consumers should and do choose among their financial alternatives. macroeconomists must be concerned with the consumer sector. and borrowing by consumers can fuel.org by Indian Institute of Technology . examining corporate governance in the mutual fund industry). and government policy.org  Consumer Finance 241 . and governments interact to deliver the financial functions required by consumers that enable them to allocate money. Mankiw (2009) notes that the word economy comes from the Greek word oikonomos. Furthermore. the primary research focus is to understand how households. Rev. Annu. For others. and technology. and inform. effort. the consumer’s decision is made in the context of a web of relationships with businesses. For personal use only. industrial organization economists. analyze it. political scientists. law. or limitations in the capacities of consumers to search for information. and social networks that shape the decisions and how they are perceived. businesses.THE STATE OF CONSUMER FINANCE Researchers in economics and finance study the allocation of scarce resources. Fin. For some researchers. sociology. but does the form of payment affect consumer behavior? The introduction of electronic www. then laws and regulations play an important role. New research on consumer decision making—such as the work on automatic enrollment—promises to dramatically change saving and spending behavior through better financial products and regulations. and nonfinancial elements.annualreviews. time.New Delhi on 08/22/10. Downloaded from arjournals.. Payments.1:227-247. policy analysts. borrowing. The broad benefits of deeper study of consumer finance may be substantial. The multidisciplinary nature of consumer finance problems makes them exciting. FUTURE ISSUES 1. and research should embrace neoclassical economics.

U. households have high levels of borrowing and low levels of savings. DISCLOSURE STATEMENT I am the co-organizer of the NBER Working Group on Consumer Finance. Where else can this technique be applied? Consumers will need to make some financial decisions in settings where automatic features may be infeasible.. etc.org by Indian Institute of Technology . finds that easy access to credit affects spending behavior and willingness to pay. Econ. to support savings (Tufano & Schneider 2008)? Financial decision making. Can households determine an overall level of risk protection and separately consider how this bundle might be allocated among different products? Shiller (2004) has taken a leading role in advancing new risk-management contracts for housing. Downloaded from arjournals. For personal use only. information. rather than as a portfolio related to households’ overall risk profiles. Offering sensible defaults can dramatically change behavior. and what impact might this have on decision making? Managing risk. and consumption? What is an optimal level of leverage for a household? Is there a difference between leverage taken on for asset purchases versus current consumption? What is the optimal set of bankruptcy or loan modification rules to help current families in distress fairly and efficiently. Defined contribution plans leave much of the decision about how much to save for retirement—and how to invest it—in the hands of individuals who may be unwilling or unable to make wise choices.annualreviews. 3. Is it possible to create better risk-management products for families? Borrowing and credit.2. How has the easy access to credit through credit cards and home equity products changed household leverage. provide a better understanding of consumer decision making? Budgeting is tedious. Can we create a modern version of defined benefit plans? Short-run or rainy-day saving is the primary savings goal for the bottom quintiles of the U. In investing.1:227-247. Agarwal et al. 2009. 5. 2007.d2dfund. Household risk. and mechanisms to cope with risk? Risk products tend to be marketed individually.New Delhi on 08/22/10. What skills. or advice do consumers need to make better decisions? What is the best way to deliver these skills? What is the potential for delivery of financial education through new media and channels (financial entertainment)? Annu. is among the least explored topics in consumer finance. among others. or alternatively fun or exciting. a nonprofit research and development firm that designs and tests financial innovations to serve 242 Tufano . I am the cofounder and Chairman of Doorways to Dreams Fund (http://www. heating. What is the optimal amount of short-term savings for households? What instruments are appropriate for this type of savings? Can it be made automatic. Can this information. What is a useful measure of a household’s current level of risk—its ability to bear financial shocks. perhaps combined with geo-data.org). 2008).S. Research by Prelec & Simester (2001). Can electronic payment systems facilitate real-time budgeting.S. Consumers need to make a bewildering array of financial decisions. but also establish appropriate incentives for behavior? Saving and investing. population. Rev. apart from investment risk aversion. one can separate asset allocation and security selection decisions. but critical for healthy household functioning. or Cole et al.g. Fin. 4. payment systems (cards and mobile or m-banking) provides researchers with microtransaction data (e. savings.

ed. Merton. Rev. 2001. 2009. 1991[1932]. In Tax Policy and the Economy. “As members of a social whole”: A history of social reform as a focus of home economics. Laibson D. T Sinha. Rev. J. www.annualreviews. 2003. Financ. For personal use only. Asis Martinez-Jerez. Philosophical Studies of Home Economics in the United States: Our PracticalIntellectual Heritage. Howell Jackson. 2002. and am on a Federal Reserve Bank of Boston advisory group. 2009. Do financial institutions matter? J. J. Liu C. In press Berk JB. LITERATURE CITED Agarwal S. DA Wise. Econ. Stud. Behavioral aspects of corporate financing. and my colleagues at D2D Fund. 38–68. In Living With Defined Contribution Pensions.org by Indian Institute of Technology . Schneider D. Econ. Robert C. Karlan D. Downloaded from arjournals. Laibson D. 2009. Odean T. Rev. Stud. ed. S Schieber. Madrian BC. Annamaria Lusardi. Boys will be boys: gender. Madrian BC. Fin.New Delhi on 08/22/10. J. Q. 2001. In Research Findings in the Economics of Aging. Piscataway. In Lessons from Pension Reform in the Americas. Mutual fund flows and performance in rational markets. Financial illiteracy. am a Research Fellow at the Filene Research Institute. Sci. ACKNOWLEDGMENTS I thank Andrea Ryan for her outstanding research assistance on this project. pp. Choi J. Penn. Online investors: Do the slow die first? Rev. Consum. Advance access published on January 21. Fam. and Daniel Schneider.org  Consumer Finance 243 . 2004. Credit card puzzles and debt revolvers for self control. Financ. Cambridge. NJ: Transaction Books Bernheim BD. SJ Kay. 1998. East Lansing: Mich. ed. 1:In press Barber B. Press Beshears J. 2007. The reaction of consumer spending and debt to tax rebates– evidence from consumer credit data. State Univ. 116:261–92 Barber B. 32:104–26 Ashraf N. Econ. 2008.1:227-247. Res. of Fin. Beshears J. Financ. Tufano P. ed. Happier. J. JM Poterba. and the Filene Research Institute. 121:635–72 Baker M. Chalmers JMR. Coleman J. Green RC.annualreviews. New York: McGraw-Hill Bergstresser D. One of the research projects cited in this piece was completed by D2D Fund. 1895–1940. the FDIC. Reiter M. 2009. Annu. Philadelphia: Univ. 2006. I benefited from many conversations on this topic over the years with Dennis Campbell. All of these organizations have taken public positions on some of the issues mentioned in this chapter. Means GC. Rev. Assessing the costs and benefits of brokers: A preliminary analysis of the mutual fund industry. Annu. Odean T. my students at HBS. The Modern Corporation and Private Property. education and retirement saving. Q. Haliassos M. 2009. Oxford: Oxford Univ. Shawn Cole. Polit. 112:1269–95 Berle AA. O Mitchell. Finance 56:1165–75 Apple RD. 1985. 2007. Chicago: Univ. overconfidence and common stock investment. Choi J. Chicago Press Beverly S. 59–87. J. John Campbell. pp. I am grateful for funding by the HBS Division of Research and Faculty Development. 115:986–1019 Allen F. Tufano P. The impact of employer matching on savings plan participation under automatic enrollment. Tying Odysseus to the mast: evidence from a commitment savings product in the Phillipines. Yin W.low to moderate income families. MA: MIT Press Brown MM. The importance of default options for retirement saving outcomes: evidence from the United States. 15:455–88 Ben-Sharar T. 20:111–62. Econ. 2006. Souleles NS. Econ. I also serve on the FDIC’s Advisory Committee on Economic Inclusion. Polit. Splitting tax refunds and building savings: an empirical test. 2009. Econ. Press Bertaut CC.

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Econ. For personal use only. 1959Q1-2009Q1 (1959 = 1).2). Fin. Rev.0 Annu. consumer debt (1. Data can be found at http://research.5 0.S. Ratios as of 2009 Q1 were as follows: Liabilities/assets (2.5 1. Bureau of Economic Analysis’ National Income and Product Accounts (NIPA) and represents the ratio of personal saving to DPI.org by Indian Institute of Technology . Mortgage Debt is the ratio of mortgage liability to household real estate values.0 1. mortgage debt (2.0 199 9 200 1 199 5 198 5 198 7 198 3 198 9 197 5 196 7 197 1 196 1 195 9 196 3 196 5 196 9 197 3 197 7 197 9 198 1 199 1 199 3 199 7 200 7 200 3 200 5 200 9 Liabili es/Assets Figure 1 Mortgage Debt Consumer Debt Savings Rate Consumer debt and savings rates.annualreviews.txt.1:227-247.2). 2009. and savings rate (0.stlouisfed. www.org/fred2/data/PSAVERT. Consumer Debt is the ratio of consumer revolving and non-revolving debt to disposable personal income (DPI). Downloaded from arjournals.6).org  Consumer Finance C-1 .5 2. 0.7). Debt data are from the Federal Reserve’s Flow of Funds for households and non-profits.New Delhi on 08/22/10.2.annualreviews. The savings rate is based on the U.

. . . . . . . . . . . . . . . . . . . .annualreviews. . . . . . . . 2009 Preface to the Annual Review of Financial Economics Andrew W. . . 97 Modeling Financial Crises and Sovereign Risks Dale F. . . . . . . . 207 Consumer Finance Peter Tufano . . . . . . . . . . . . . . . . . . . . . . . . . . . Econ. . . . . . . . . . . . . . . . . . . . . Ana Babus. . . . . . . . . . . . . . . . . . . . . . 37 The Term Structure of Interest Rates Robert A. . 69 Financial Crises: Theory and Evidence Franklin Allen. . . Jerome Detemple. . . . . . Rev. . . . . and Marcel Rindisbacher . . . . . . . . . . . . . . . . . . . Downloaded from arjournals. . . . . . . . . . . . . . . . . . . . . 145 Capital Market-Driven Corporate Finance Malcolm Baker. . Gray. . . . . . . . . . . . . . . . . . . Merton . . . . . and Elena Carletti . . . 19 Credit Risk Models Robert A. . . . . . . . . . . . . . . . .New Delhi on 08/22/10. . . . . . . . . . . 181 Financial Contracting: A Survey of Empirical Research and Future Directions Michael R. . 227 Life-Cycle Finance and the Design of Pension Plans Zvi Bodie. . For personal use only. Roberts and Amir Sufi . . . . . . . . . . . . . . . . . . . . . . . . . Jarrow . . . . . . . . . . . . . . . . . . 1 An Enjoyable Life Puzzling Over Modern Finance Theory Paul A. . . . . . . . . . . . . . . . . . . . . . .1:227-247. . . . . . . . . 2009. . . . Lo and Robert C. . Samuelson . . . . . .org by Indian Institute of Technology . . 117 Never Waste a Good Crisis: An Historical Perspective on Comparative Corporate Governance Randall Morck and Bernard Yeung . . . . . . 287 ¨¸ v . . . . . . . . . . .Annual Review of Financial Economics Contents Annu. Jarrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 ´ ˆ Finance and Inequality: Theory and Evidence Asli Demirguc-Kunt and Ross Levine . . . . . . . . . . . . . . Volume 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fin. . . . . . .

. . . . . . . . . .annualreviews. . . . . . . . . . . . . . . 341 ¨ Learning in Financial Markets Lubos Pastor and Pietro Veronesi. . . . . . . . . For personal use only. .1:227-247. . 319 Estimating and Testing Continuous-Time Models in Finance: The Role of Transition Densities Yacine Aıt-Sahalia . . . . . . . . . . . . . . . . . . . . . . . . .org by Indian Institute of Technology . . .New Delhi on 08/22/10. . Fin. . . Econ. .org Annu. Rev.Volatility Derivatives Peter Carr and Roger Lee . . . .annualreviews. . . . . . . . . . . . . . . . . . . . 2009. . . Downloaded from arjournals. . . . . . . . . . . . . . . . vi Contents . . . . . . . . . . . . 361 What Decision Neuroscience Teaches Us About Financial Decision Making Peter Bossaerts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383 Errata An online log of corrections to Annual Review of Financial Economics articles may be found at http://financial. . .