Essays in Household Finance

Abstract

In recent years, the analysis of household financial decision making has become the main focus for both policymakers and academics. Hence this thesis first sets out to investigate the role of household financial literacy and psychological characteristics in household financial decisions. The results suggest that financial literacy is significantly associated with household financial management and practices such as credit management, cash flow management, retirement saving and investment. Further, while exploring the importance of stock market literacy on household decision to participate in the stock market, it is found that stock market literacy and trust distinctly influence the probability of household participation in the stock market. Furthermore, stock market literacy not only increases the likelihood of participation but also influences the share of wealth invested in the stock market. Also, economic shocks and future expectations are the key psychological characteristics that explain household decision to invest in stocks. However, upon participation, a larger set of psychological characteristics such as, past economic shock, future expectations, self-confidence, and time preference influence a household decision on how much to invest in stocks. Finally, the thesis examines the unwise financial decisions of households in unsecured debt management, credit card debt, mortgage debt management and investment diversification. The results show that financial distress and poverty increase the likelihood of households making unwise financial decisions. However, financial distress is found to outperform poverty in explaining the unwise financial decision of the households. Thus, the thesis brings to light the importance of financial literacy, psychological characteristics and financial distress for understanding household financial decision making.