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Abstract

Purpose: Household financial decisions are complex, heterogeneous, interdependent and integral to the effective functioning of financial markets. The purpose of this study is to present an overview of household finance with respect to the determinants of the composition of household assets and liabilities, risk preferences and beliefs. Design/Methodology: As a review study, this paper asks and attempts to provide answers to specific questions. Why is household finance an important academic field of study? What are the main components of household assets and liabilities? Who are the owners of tangible assets and what factors determine allocation of wealth between real and financial assets? What is the framework for characterizing risk aversion? Findings: The findings are as follows. Household assets and liabilities are driven by risk preferences, beliefs or expectations and other factors. Household assets consist of human capital and tangible assets. Tangible assets consist of real assets and financial assets. Risk preference is sensitive to wealth levels, consumption commitments, gender, intellectual ability, background risk, past experiences, age, and other personal attributes of households. Time-varying risk aversion has also been used to describe evolution of asset prices, including the equity premium and stock returns volatility. Habit formation models rationalize consumption smoothing thus indicating why market volatility has historically outweighed aggregate consumption variability. Originality: Household finance is a growing sub-field of finance and as such, a review of this sort, with added perspectives from developing countries, adds to the growing