The revealed preference perspective leaves no room for normative economics as distinct from positive economics. Revealed preference theory ( Samuelson (1938)), for example, shows how one can work backwards from a household's choices over multiple consumption goods to the implied preferences of the household. Economists have often assumed either that actual and ideal behavior coincide, or that they can be made to coincide by the selection of an appropriately rich model of agents' beliefs and preferences. Positive research describes what economic agents actually do, while normative research prescribes what they should do.
Research in finance, as in other parts of economics, can be positive or normative. In that context, however, wealthy and risk-tolerant households have a disproportionate impact on equilibrium asset returns while in the household finance context the behavior of typical households is of greater interest. Of course, household asset demands are important in asset pricing too. Households must plan over long but finite horizons they have important nontraded assets, notably their human capital they hold illiquid assets, notably housing they face constraints on their ability to borrow and they are subject to complex taxation. Household financial problems have many special features that give the field its character. Economists in the latter field ask how business enterprises use financial instruments to further the interests of their owners, and in particular to resolve agency problems.īy analogy with corporate finance, household finance asks how households use financial instruments to attain their objectives. Economists in the former field ask how asset prices are determined in capital markets and how average asset returns reflect risk. Teaching and research are presently organized primarily around the traditional fields of asset pricing and corporate finance.
I use this opportunity to explore a field, household finance, that has attracted much recent interest but still lacks definition and status within our profession. Search for more papers by this authorĪ presidential address is a privileged opportunity to ask questions without answering them, and to suggest answers without proving them.
This material is based upon work supported by the National Science Foundation under Grant No. Allie Schwartz provided able research assistance for Sections II and IV. I am grateful to Laurent Calvet and Paolo Sodini for allowing me to draw on our joint research in Section III. I would like to acknowledge, however, the special influence of my dissertation advisers at Yale, Robert Shiller and the late James Tobin, and comments received from Robert Barro, Dan Bergstresser, Steve Cecchetti, Karine de Medeiros, Xavier Gabaix, Michael Haliassos, David Laibson, Anna Lusardi, Greg Mankiw, James Poterba, Tarun Ramadorai, Robert Shiller, Andrei Shleifer, Nick Souleles, Jeremy Stein, Sam Thompson, Luis Viceira, Tuomo Vuolteenaho, Moto Yogo, Luigi Zingales, and seminar participants at Harvard.
It reflects the intellectual contributions of colleagues, coauthors, and students too numerous to thank individually. This paper was delivered as the Presidential Address to the American Finance Association on January 7, 2006. CAMPBELLDepartment of Economics, Harvard University and NBER.