Household Finance

The subject of household finance has grown into an acute area of economic focus, in recent decades. As household portfolios have become more sophisticated, researchers have become more interested in new financial challenges.
Financial decision making is difficult. It is basically in tandem with uncertainty about future. It is dependent on future income, liquidity and interest rates. There is a lot to discuss in this field. Since it is highly twisted with the daily life and also important for ordinary people, even though they may not have the related academic knowledge.
According to the evidence, it is revealed that there are systematic biases in making a decision. Which are systematic departures from what persons aim to do and what they actually do. It can be said that poor people are basically faced with deeper consequences of biases in financial decision making. Since they are on the edge of poverty and can’t handle the margin of error. People are more careful in this field, but due to the complexity of the nature of this decision making, they may get lost and hazy. On the other hand, poverty also boosts uncertainty related to the future life by increasing people’s attention on the budget constraint and scarcity.
According to a broad range of studies, people use to interpret the results of financial outlooks in terms of gains and losses. They normally put more weight on potential losses than on gains. People are basically risk averse and invest little in risky assets and in some cases they own no risky investments at all. These kinds of financial decisions result in economic issues. For more illustration, evidence from six Latin American countries shows that the attitude to overvalue losses and undervalue gains may result in considerable welfare losses.
Bearing in mind these considerations, only establishing institutions may not be effective enough to progress individuals’ decisions. In particular, developing countries need more accurate policies to affect behavioral financial decision making. In this regard, it is so beneficial to investigate ways that make institutions more responsive to the behavioral factors of people’s financial decisions and also appropriate ways to design and implement policy goals like increasing savings. Specifically, considering different examples of interventions that have helped behavioral constraints on financial decisions, would be helpful.
The evidence displays that psychologically realization of decision making can help policy makers improve the accordance between intended and real outcomes of a policy and also help persons attain their financial goals.

Generally, policies that enhance risk tolerance and decrease investment aberration are useful. In this regard, policies would better include different items like changing default choices or simplifying financial education.

As household finance and related biases have been recently heated debates for researchers, authorities and a lot of people, what can be done to make an improvement in this field?

Reference: The World Bank and Centre for Economic Policy Research (CEPR)

4 thoughts on “Household Finance

  1. Household finance is very important in development discussion, it is paramount to mention that in most families situated in emerging economies, the main provider of income is the Father while the mother is like a house wife, because she has been marginalise to play this role, therefore the household income strongly depends on the efforts or qualification of the father, however, if women are giving more roles in the society, they can help increase household finance and make contributions, to family expenses, in addition, Microfinance institutions and international organizations or NGOs can provide soft loans with reasonable interest rate to families to help boost their income.

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  2. First of all, thank you for your comment. I appreciate you for spending time and sharing your opinion.
    I would like to add that in the case of developing countries I do agree with you, fathers carry this burden. Although the situation is changing as the time goes by, it is not that significant and they are still much more responsible.
    Low-interest rate loans sound helpful, especially for poor people. They can make a decision more easily, handle the margin of error and take risks in some cases. It can help them not to think about the future and risks they are taking a lot, and focus on their current business.

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  3. I just wanted to add that you are right. In some countries women are still observed as homemakers only, so they just basically do not require a university degree, they need to cook, clean, take care of kids. However, in developed countries the situation is way more optimistic. Men tend to look at their spouses as at the partner with equal rights and needs, so it helps to get better off in a household utility.
    For instance, in Sweden fathers can take a child care leave. The system allows both parents to stay at home in total 480 days. At the same time both spouses remain fully paid and, what is more, they also get a finance support from the state. But all these privileges can be taken if at least 60 of these days are taken by a dad. More and more Swedish men are taking a chance, as it helps not only to take mentioned advantage but to save money as well (as they don’t need to use day nursery).
    So I would say that not only new institutions, regulations and laws might be helpful, but also equal relations.

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  4. Thank you for your further information.

    The situation you mentioned above is quite helpful and perfect for household financing. Unfortunately, I can say that it is restricted to developed countries like Sweden, as you perfectly illustrated. Basically, lives should be based on equal relations. But we witness that there is not any opportunity for such an equality in developing countries.
    I do agree with you with the equal relations and its benefits, but I would mention that there should be a basement to apply such strategies in the society. Furthermore, I think some special organizations and legislations are responsible for providing them.

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