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

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 econo-

my, 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 rela-

tive 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, finan-

cial 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 representa-

tion acknowledges the broad range of actors in the financial system, the boundaries of

financial economics research are somewhat narrower. Using Journal of Economic Litera-

ture (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 inter-

mediaries1, 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 econom-

ics.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 innova-

tion, 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.

A FUNCTIONAL DEFINITION OF CONSUMER FINANCE

What is consumer (or household) finance? Campbell (2006, p. 1553) argues that house-

hold finance “asks how households use financial instruments to attain their objectives.”

1In 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.

2Public 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.

JEL: Journal ofEconomic Literature

AFA: American

Finance Association

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Recognizing the roles of households, businesses, and regulators, a more expansive defini-

tion 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, how consumers

make financial decisions, and how government action affects the provision of financial

services.

The definition is admittedly tautological as it refers to undefined financial functions.

However, I adopt the functional approach of Crane et al. (1995) and Merton & Bodie

(1995), which holds that financial systems are best understood in terms of the functions

they deliver. These functions are stable, even though they may be delivered by a wide

variety of institutions and through a wide range of products. To further clarify my proposed

definition, I identify four primary and necessary functions of the consumer finance sector:

� Moving funds. The financial system must provide a mechanism for the transfers of

money and payments for goods and services. In the consumer sector, the payments

function would include cash, checks, debit cards (including prepaid), credit cards, postal

and private money orders, wire transfers, remittances, barter, online funds transfer tools

like PayPal, Automated Clearing House (ACH) transactions, payroll systems, and the

infrastructure that supports all of these activities. These products are delivered by a host

of organizations, including the government (e.g., money and post offices), banking

organizations, nonbanks (e.g., check cashing stores), data processors, online businesses,

and others.� Managing risk. The risk-management function is satisfied through a variety of products

and services, including insurance (health, life, property and casualty, disability), the

purchase of certain financial products (e.g., put options to protect one’s portfolio

against declines), precautionary savings, social networks, and government safety nets.

The organizations that perform this function range from the family and local communi-

ty to insurance companies and government disaster relief plans. From the perspective of

businesses that serve consumers, risks are managed through credit scoring models and

credit risk practices, as well as by assembling a diversified portfolio or securing insur-

ance against default.� Advancing funds from the future to today. This function is embodied in household credit,

which ranges from shorter-term unsecured borrowing (e.g., credit and charge cards,

banking overdraft protection, and payday loans), to longer-term unsecured borrowing

(e.g., student loans, person-to-person lending), to secured borrowing (e.g., auto loans,

mortgage loans, and margin loans). The provision of credit can take place through the

formal sector, through the informal sector (e.g., friends and family), and through various

hybrid organizations (e.g., person-to-person lending Web sites). In addition to explicit

borrowing, implicit borrowing is built into various derivative products, including

options and forwards, as well as prepaid structures (e.g., rent-to-own schemes).� Advancing funds from today until a later date. The investing or savings functions are

embodied in a host of products and services, including bank products (savings accounts

and CDs), mutual funds, variable annuities, workplace retirement programs, and Social

Security. These products vary based on the intended time horizon, level and type of risk

borne by the investor, tax treatment, and other factors. Arguably, most of the existing

literature on consumer financial decisions is focused on the saving and investing functions.

To understand the ubiquity of these functions, we can look at the adoption of various

financial products. Using data tabulated from the 2007 Survey of Consumer Finances (SCF)

SCF: Survey of

Consumer Finances

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(http://www.federalreserve.gov/pubs/oss/oss2/2007/scf2007home.html), more than 90% of

Americans have a transaction (checking) account. The remainder presumably use some

combination of cash or alternative payment systems (e.g., check cashers, money orders).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.4 Seventy-seven percent

of households report having debt (of any kind). Generally speaking, policy concerns often

focus on the fraction of Americans in the most precarious financial situations—particular-

ly those without savings or health insurance, or with inadequate levels of both.

To deliver payment services, manage risk, and move funds backward and forward in

time, a financial system must also deliver a set of ancillary functions:

� Pooling. Small transactions (assets or liabilities) can be combined to create portfolios

that facilitate economies or diversification. Mutual funds, for example, allow investors

to buy shares in a pool, giving them access to economies of scale, diversification bene-

fits, and professional management and administration. Pooling is also exemplified

through securitization, as well as through all intermediated businesses, and is present

in most borrowing and lending transactions (Sirri & Tufano 1995).� Providing financial information to facilitate decision making. Consumers gather infor-

mation and make financial decisions with the help of formal and informal financial

education, marketing activities of product vendors, news from the financial press,

advice from brokers and advisors, disclosures mandated by government bodies, and

advice delivered by a person’s social networks. The current interest in behavioral

finance deals primarily with the quality of household-level decision making, as well as

those mechanisms that lead to better decisions. Government policies often attempt to

improve the process of decision making by setting disclosure requirements, 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. Consumers can make decisions by themselves, or delegate these

choices to others, such as brokers, financial advisors, or bank trust departments.� Dealing with information asymmetries and incentive conflicts. In all consumer busi-

nesses, at least two, but often three, parties contract with one another formally or

informally. Having multiple parties involved leads to potential conflicts of interest,

which each party—as well as government—seeks to mitigate. Consumers address con-

flicts with others when selecting the firms and people with whom they do business, as

well as through the structure of both explicit contracts and implicit arrangements in

social networks. Businesses use a similar set of tools. In addition, both groups use the

threat of litigation both to forestall incentive conflicts and to redress them. Govern-

ments play a key role in incentive conflicts by regulating certain actions, as well as by

establishing guidelines for behavior embodied in the legal system. For example, the legal

concept of fiduciary duty was established by society to preemptively address incentive

conflicts. A fiduciary’s duty of loyalty is intended to establish norms for behavior

between certain providers of financial goods and services and their customers, namely

3For information on the shift from checks to electronic payments, see Gerdes et al. (2005).

4The SCF data represent weighted fractions of respondents with these products. The insurance statistics

come from industry sources [http://www.cbpp.org/8-29-06health.htm and http://www.flexfs.com/pdf/LIMRA-

factsaboutlife2005complete%20(2).pdf].

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that the provider acts in the best interest of the customer. In short, potential incentive

conflicts exist in the delivery of nearly all financial functions.5

The functional approach to defining consumer finance can be contrasted with a prod-

uct or institutional approach. These more traditional approaches must contend with the

fact that a single product or institution delivers many different functions, and a single

function may be delivered by a host of seemingly unrelated institutions or products. For

example, a bank or credit union often will offer savings products, lending products,

payment products, and even some risk-management products (i.e., loan insurance). They

also provide pooling, as well as information (advice or marketing), and resolve informa-

tion asymmetries and incentive conflicts. Another single institution may deliver a form of

all of the financial functions. A single product, such as the credit card, provides multiple

functions as well—not only extending credit, but also providing payment services by

delivering funds to merchants. Although one can study banks or credit cards alone, an

institution focus runs the risk of confusing or conflating the various functions and may

miss relevant competitors and alternative providers.

A functional approach best ensures that our analysis is not constrained by artificial

boundaries imposed by traditional product categories, or differences in institutional con-

ventions across jurisdictions or over time. It has a second benefit, too, in that it forces one

to have a user-oriented focus on the financial system. People who want to borrow money

do not necessarily begin with a single product (e.g., a credit card) or even a single institu-

tion (e.g., Bank of America). Rather, they will look across a variety of formal financial

institutions, and may also consider informal institutions, such as their social networks.

Therefore, taking a functional approach to understanding consumer finance serves

researchers well.

THE SCALE OF CONSUMER FINANCE

With such an expansive definition, it should be clear that consumer finance is a substantial

element of the financial sector. Using the United States as an example, one can get a

sense of the magnitude of the consumer finance sector as a driver of the economy.6 The

Federal Reserve’s Flow of Funds data are a commonly used source for aggregate statistics

(http://www.federalreserve.gov/releases/z1/). According to the latest numbers available as

of this writing (2009 Q1), households7 held $64.5 trillion in assets, with 37.5% ($24.2

trillion) of these funds held in tangible assets (mostly real estate) and $40.3 trillion in

financial assets. In aggregate, households held $14.1 trillion in liabilities, mostly home

mortgages ($10.5 trillion) and consumer credit ($2.5 trillion, primarily in credit cards).

Corporations are central to financial economics. Surely, businesses produce goods and

services, and provide employment. Yet in sheer size, the household sector dominates the

corporate sector. Corporate (nonfarm, nonfinancial) businesses held only $27.3 trillion in

5Large strands of the financial economics literature are concerned with these conflicts. For example, the classic book

by Berle & Means (1991 [1932]) examines the implications of the separation between ownership and control.

6Throughout the review, I use U.S. data to illustrate various points, not to suggest that consumer finance activities

are less important elsewhere, but to use a consistent set of data.

7Technically, this information refers to households and nonprofit organizations, as the two are considered a single

sector in the Flow of Fund calculations due to data limitations. Nonprofits account for 5-7% of assets and liabilities,

thus the figures largely reflect the household sector (see Teplin 2001).

www.annualreviews.org � Consumer Finance 231

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assets, roughly equally split between tangible and financial assets, so their financial asset

holdings are approximately one-third that of households. Corporations hold $13.3 trillion

in liabilities, with credit market instruments (including bank debt, commercial paper,

corporate bonds, and mortgages) accounting for $7.2 trillion, with the rest being short-

term liabilities, such as payables. Their debt is approximately one-half that of households.

Balance sheet numbers alone do not capture the magnitude of the consumer finance

sector. The payments systems used by consumers move trillions of dollars through the

economy. Just one part of that payments function—credit and debit cards—represents

trillions of dollars of annual activity. Visa and MasterCard, the two largest card associa-

tions, report more than 75 billion transactions a year, with combined transaction volume

of $6.8 trillion.8

Recent economic events have demonstrated the importance of the consumer sector to

the economy. Although there are many precipitating events that contributed to the current

economic crisis, one was undoubtedly the subprime mortgage market. Rising home values,

new mortgage products, securitization, federal policies to encourage homeownership, low

interest rates, poor business practices, and poor consumer decision making all combined

to produce over-leverage in the consumer sector. Figure 1 (see color insert) represents time

series trends for consumer leverage in the United States over the past five decades, using

different leverage measures. Increasing debt was associated with high levels of consumer

spending and low levels of saving, which is also shown in the figure. Subsequent softening

in housing prices exposed the over-leverage, leading to foreclosures that rippled from the

subprime space through CDOs and insurers to contribute to the demise of financial

institutions.9 Now, our hopes for the recovery in part hinge on the rate of consumer

borrowing and spending, some of which are changing very rapidly.

Some finance academics argue that the field of finance is defined by whether the

activity affects asset prices. Even by this narrow definition, consumer finance deserves a

prominent place in the field of financial economics and in business schools. Curiously, it

has a remarkably small footprint in both, and as Campbell notes, suffers from lack of

status. Why?

A SPECULATIVE HISTORY OF SCIENCE: THE SPLIT OF CONSUMERSTUDIES FROM BUSINESS STUDIES

Every one of the top 20 U.S. MBA programs offers at least one course on corporate

finance; however, as of 2008 only two MBA programs offer explicit courses on consumer

or household finance.10 When addressed, consumer finance typically is an ancillary com-

ponent of related offerings. For example, courses on banking and financial institutions are

offered by 14 schools, but a review of their course descriptions and the leading textbooks

suggests that consumer-facing businesses and households account for relatively little of the

8See http://www.corporate.visa.com/av/pdf/Visa_Corporate_Overview.pdf (data as of September 2008) and

http://investorrelations.mastercardintl.com/phoenix.zhtml?c=148835&p=irol-reportsannual (data as of December

2008). Figures represent all card transactions worldwide.

9Although there are many explanations of the phenomena, readers are referred to Shiller (2008) for a concise

summary.

10These two courses were both introduced in 2008–2009. Information on the course offerings at the top 20 MBA

programs (as ranked by Business Week and U.S. News and World Report) was gathered online in September of

2008, using program Web sites and online catalogs.

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content. (The traditional sequence discusses money and interest rates, then describes the

various institutions, regulation, and the management of the institutions.) Behavioral fi-

nance courses are offered at seven programs, but most focus solely on investing decisions,

not the full range of consumer financial decisions. Other related courses have six or fewer

offerings, such as microfinance, personal taxation, and residential real estate.

Economics departments likewise spend relatively little class time on consumer finance

issues. The top 20 economics graduate programs all offer courses on microeconomics that

deal with the decisions of representative consumers.11 Nine graduate programs offer be-

havioral economics courses, but these courses tend to examine the consumer in isolation

from business or regulation, and to consider the decision-making process primarily in the

context of investing decisions.

Why does consumer finance receive so little attention in business schools and main-

stream economics departments? One possibility is that consumer finance is so inherently

multidisciplinary that it falls between the cracks. As this review makes clear, consumer

finance requires an understanding of not only finance and economics but also psychology,

sociology, industrial organization, and the law. Focusing primarily on the finance and

economics communities, Campbell suggests that the problem may lie in two difficulties

encountered by would-be researchers. First, it is hard to observe and measure household

activity. There are few data on transactions, data are restricted by privacy considerations,

and surveys are inherently suspect. Second, he argues that “household decision problems

involve many complications that are neglected by standard textbooks” (Campbell 2006,

p. 1558). These complications include the complex math of intertemporal models, the

need to model nontradable human capital and illiquid housing, and the Byzantine nature

of personal taxation.

Campbell’s diagnosis is correct, yet it also applies to many other parts of academia. The

question is, what has held us back from addressing these limitations while plowing for-

ward 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. However, there is another hypothesis for this inattention and the low status

granted to consumer finance. 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. Elite urban universities emphasized businesses and prepared men to lead them;

rural land-grant universities studied households and prepared women to lead them. In

essence, the study of consumers’ financial needs was subsumed under the field of home

economics or consumer science, which was, and still is, divorced from mainstream eco-

nomics and business.12

This intellectual divide can be traced to the 1800s. Industrialization and urbanization

were changing the American way of life and causing many to fear the demise of the

traditional moral fabric (Brown 1985). The blame for these changes often was placed on

commerce, thought to be “not merely demeaning, but possibly corrupting” (Daniel 1998,

p. 28). In response, there became an increasing urgency to recast the status of the busi-

nessman from profit-seeker to professional (Khurana 2007). This emerging philosophy

11The top 20 graduate programs in economics were identified based on the U.S. News and World Report 2008

ranking (http://grad-schools.usnews.rankingsandreviews.com/grad/eco/search). Details were gathered online in

December of 2008 using program web sites and online catalogs.

12I thank Andrea Ryan for bringing her sociological perspective to this section.

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was embodied in the missions of the first university-based business school, the Wharton

School, which opened in 1888, and the first graduate business program at Harvard, which

launched in 1908.

Concerns about the decline of social order also highlighted the importance of main-

taining order in the home. At the same time, women were beginning to shed their role as

strictly homemakers and to secure advanced education and develop professional careers.

The tension between the increasing importance of managing the home and the opportunity

to have a professional career gave rise to a new discipline, soon named home economics.

This application of science to domestic life took root in universities nationwide (Stage &

Vincenti 1997). Home economics emphasized not only nutrition and sanitation but also

financial management. Just as the men were to be both businessmen and civic stewards,

each woman’s civic duty was to ensure that her home was well cared for, running smooth-

ly, and contributing to the larger community and society (Apple & Coleman 2003). The

homemaker was a manager of one portion of the economy—the place where everyone,

and especially men, laid their heads and wallets each night. In essence, then, homemakers

were charged with managing much of the “private economy,” while they did their “social

and municipal housekeeping” (Apple & Coleman 2003).

These social conventions were soon reflected in academia. By the early twentieth centu-

ry, one academic profession, comprised nearly exclusively of women, focused on household

economics and management as part of the broader community (i.e., the consumer), the

other, comprised nearly exclusively of men, on businesses as part of the broader society

(i.e., commerce). The careful understanding of households—including their finances—was

embraced by and grew as a result of rural land-grant colleges, having come about under the

1862 Morrill Act and its call for practical education in “agriculture and the mechanic arts”

(Stage & Vincenti 1997). In contrast, the study of businesses and the institutions that

financed them were more typically found in urban business schools (Khurana 2007).

Nearly a century later, this schism still largely persists. What we call consumer finance

is most often studied in consumer science programs, not in business schools or economics

departments. Often called personal finance, this discipline applies “principles of finance,

resource management, consumer education, and the sociology and psychology of decision

making to the study of the ways that individuals, families, and households acquire,

develop, and allocate monetary resources to meet their current and future financial needs”

(Schuchardt et al. 2007, p. 7). A perusal of a recent consumer science research compendi-

um (Xiao 2007) shows that the topics of interest are similar to those approaching the field

from backgrounds in financial economics.

Scholars from these two worlds rarely interact. Their conferences are distinct, and their

journals are quite separate.13 Furthermore, to this day, the ratio of men to women faculty

members in these respective programs, as measured by their professional associations,

continues to reflect their history. Male faculty members comprise between 83% and 89%

of finance departments at the top 20 business schools, as measured by membership in the

AFA.14 In consumer science programs, women dominate, comprising 62% of faculty in

13The list—unfamiliar to most financial economists—includes the Journal of Consumer Affairs, International

Journal of Consumer Studies, Financial Counseling and Planning, Journal of Financial Planning, Financial Services

Review, Family and Consumer Sciences Research Journal, and Journal of Family and Consumer Sciences.

14A Web search was conducted in December 2008 using the AFA’s online directory. In some cases, faculty gender

was not readily discernable by forename. The 89% represents the proportion of men given all “known” faculty

genders. The 83% figure counts all individuals identified as “gender unknown” as women.

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the top 10 most active departments, and 84% of the American Association of Family and

Consumer Science’s Higher Education Unit.15 Land-grant universities continue to be a

dominant force in this field.

Beyond data limitations and modeling difficulties, the absence of the consumer from

consideration by top business schools—and top universities—may reflect historic divides

of gender and geography. With new interest in consumer finance, and consumers more

generally, perhaps this divide will be closed. One positive sign is that, in the recent

revamping of the curriculum at the Yale School of Management, the consumer was

explicitly acknowledged as one of the core topics of study. Another positive sign is the

2009 formation of a consumer finance working group at the National Bureau of Economic

Research.

A BRIEF TAXONOMY OF RESEARCH IN CONSUMER FINANCE

Without a central home in business schools or economics departments, research on con-

sumer finance is disbursed among economics, finance, psychology, sociology, consumer

sciences, and the law. Although the different groups are interested in similar phenomena,

they approach them with different languages and tools. Given the breadth of the field and

related disciplines, this review is insufficient. Wherever possible, I cite survey pieces that

cover portions of the field. With these risks in mind, I divide the studies by the primary

decision maker considered by the work: the consumer, the financial institution, the gov-

ernment, or a combination of these players.

The Consumer

There is substantial normative and positive work on consumer financial decision making.

Merton’s (1971, 1973) seminal work exemplifies normative research in this area. Al-

though based on simplified assumptions, it provides high-level guidance for representative

households, calculating an optimal portfolio given time-varying investment opportunities,

and concluding that investors should hedge shocks to their wealth as well as to expected

returns on that wealth. Financial economists have built upon this solid foundation, study-

ing the impact of shocks to real interest rates and the equity premium. Subsequent models

have examined the implications of richer sets of portfolio choices, with wealth also held in

the form of nontradable human capital and housing (see Campbell 2006 for an overview).

Other normative work, typically called personal finance or financial planning, provides

less elegant advice, but is linked to actual products and services. In most consumer science

programs, personal financial management is a standard offering, and there are many

textbooks in this field. These books cover topics such as how to set up a household budget,

how to manage credit card debt, how to evaluate insurance, etc.

There is often a considerable gap between scholarly work and this advice. For example,

although financial planners advise risk-adverse or older households to hold bonds, until

relatively recently academic models largely ignored bond holdings. For example, academic

research by Campbell & Viceira (2001) only recently reconciled the holding of bonds as

15The top 10 most active departments were defined as a result of online research in September 2008. Wherever

possible, only faculty teaching consumer science courses in their division were counted. Only five of the 10

departments were represented in the association’s higher education unit.

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hedges against time-variation in interest rates. Because financial economics has not fully

embraced consumer finance topics, personal finance advice is often less driven by research

than by rules of thumb. This gap suggests an opportunity to apply scientific methods to

provide better advice, and for real-world concerns to be incorporated into models.

A second element of consumer-facing research, which spans positive and normative

work, models consumer preferences. The JEL codes’ placement of household economics

under microeconomics reflects the interest in understanding utility and consumer demand.

In corporate finance, value maximization is employed as a standard objective function and

the net present value (NPV) rule used to implement this rule. In consumer finance, utility

maximization and utility functions serve comparable purposes, but modeling household

preferences is considerably more complicated than calculating NPVs. The form of the

utility function, the parameters for the function, and even the existence of a rational

time-consistent decision maker are long studied but still unresolved research questions

(see Campbell’s 2006 discussion).

Continuing the analogy to corporate finance, Modigliani &Miller’s (1958) and Miller &

Modigliani’s (1961) seminal works demonstrated that many corporate finance decisions

(e.g., financing and dividend policy) neither create nor destroy value in the absence of

various imperfections. This stark conclusion set the stage for research into the relevant

imperfections and their impacts. Although this logic does not carry over neatly to consum-

er finance, the types of imperfections that make corporations’ decisions value-relevant also

apply to household choices. Taxes and bankruptcy are critical factors that explain corpo-

rate finance choices. Likewise, there is an extensive literature on the impact of personal

taxation on household portfolio investment decisions (for a review, see Poterba 2002), and

the Merton portfolio model has been extended to include considerations of bankruptcy

(for a review, see Sethi 1996).

Behavioral considerations have been incorporated into corporate finance only recently

(see Baker 2009 in this volume), but are central to any consideration of retail financial

services. Translating a stream of consumption into utility is an extraordinarily subjective

endeavor and even simple economic concepts are challenged. Invoking free disposal,

economists would assume that more is generally preferable to less. However, psychologists

have documented that this maxim is not always, nor perhaps even usually true, as the

wealthiest individuals are no happier than others (Ben-Sharar 2007).

There is a large and growing field of behavioral economics or behavioral finance,

which marries insights from psychology and economics. The awarding of the Nobel Prize

in Economics to Daniel Kahneman in 2002 reflects the acceptance of this approach

by mainstream economics. For surveys of this field and for an extended discussion of

the implications for practice, see DeBondt & Thaler (1995), Mullainathan & Thaler

(2001), Shefrin (2002), Subrahmanyam (2007), Thaler (1993, 1994, 2005), and Thaler &

Sunstein (2008). There are a number of key insights from behavioral economics, including

the notions that decisions relate to heuristics (i.e., rules of thumb), framing (i.e., how

information is presented or organized), and cognitive biases (e.g., misestimation and

overconfidence).

Whereas calculation of NPV is fairly straightforward, behavioral considerations make

evaluation of utility more complicated. 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, whereby people evaluate gains and losses asymmetrically.

Framed in NPV-like terms, it would require different discount rates for gains and losses,

NPV: net present value

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and might require these rates to be path dependent. Whereas most NPV models use

constant discount rates, household discount rates are likely nonconstant. Quasi-hyperbolic

discounting, in which forward rates for discounting vary wildly depending on the horizon,

has been shown to explain various consumer time preferences (Laibson 1997). A sociolog-

ical approach to utility posits preferences in terms of levels relative to others, and also

identifies the role that money and finances have in defining social groups (see Zelizer 1995

for an extended discussion of this subject). Continuing to incorporate lessons from psy-

chology and sociology will illuminate consumer financial decisions.

A positive strand of consumer-facing research studies the actual financial decisions

taken by consumers. Many of these studies report levels of financial market participation,

with the SCF providing much of the raw data. Bucks et al. (2006) provides a comprehen-

sive summary of SCF findings as well as a comparison with the prior survey. Their 2004

findings were prescient, identifying strong appreciation of house values, a marked increase

in debts relative to assets, and a rising fraction of families with delinquent payments.

Campbell’s (2006) survey begins with cross-sectional distributions of participation rates

that illustrate how ownership of financial assets increases with wealth, with less wealthy

people largely holding safe assets and vehicles; the middle class (thirtieth and fortieth

percentiles) showing a pronounced propensity to hold real estate; and the highest quintile

holding portfolios of public equities, real estate, and shares in private businesses in rough-

ly equal proportions. Building on this, Calvert et al. (2007) assess the welfare costs of

household investing mistakes. A small but interesting subvein of this participation litera-

ture looks at the adoption of innovative retail financial products by consumers (see Frame &

White 2004 for a review).

Research on financial decision making often addresses how closely behavior reflects

rational homo economicus versus a more behaviorally-challenged decision maker. An

excellent example can be found in Browning & Lusardi’s (1996) comprehensive survey of

consumer savings behavior. They review the various theories for consumer saving and the

empirical support for each. Hilgert et al. (2003) and Campbell et al. (2008) relate basic

financial decisions to personal traits, financial knowledge, community traits, and banking

practices. Campbell (2006) discusses and references the literature on home mortgage

choices. Barber & Odean’s (2001, 2002) work on investing documents loss aversion and

gender differences. 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, Ippolito 1989, Sirri & Tufano 1998). One of the key questions

is how behavioral biases affect markets. In the mutual fund context, Berk & Green (2004)

conclude that return chasing can be socially optimal.

Often, research identifies apparent anomalies, 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. Gross & Souleles (2002) were among the first to document

this latter fact. Researchers explain this phenomenon as a strategic behavior related to

imminent bankruptcy, a response to spousal self-control, time-inconsistent discount rates,

or the need for cash to pay for items that cannot be charged. Still others argue that there is

no puzzle because the two are not substitutes and have different liquidity characteristics.

This literature is still evolving with some new publications (see Bertaut et al. 2009) and

many still unpublished (see Lehnert & Maki 2007, Telyukova 2008, and Zinman 2007).

Most of this positive literature seeks to relate these household choices to factors

that include relative risks and prices of alternatives, behavioral decision-making biases,

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financial knowledge, social and community norms, preferences, affect and emotions, the

structure of financial products, and a host of other factors. For example, there is a growing

body of work linking financial behaviors with financial skills and education (see Lusardi’s

2009 volume for a summary). Studies have attempted to link this knowledge to savings

behavior and financial participation (Bernheim1998,Hilgert et al. 2003) to retirement savings

behavior (Lusardi &Mitchell 2007a,b) and to over-indebtedness (Lusardi & Tufano 2008).

Economists have begun to venture beyond psychology to understand consumer finan-

cial decision making, manifesting a new-found interest in sociology and social networks.

Because household finance typically reflects decisions of multiple people together, this

perspective, long understood in consumer sciences, is explicable. At a more fundamental

level, economists have begun to appreciate biology: Neuroeconomics attempts to explain

decisions, such as financial risk taking, to underlying biological factors. Camerer and

colleagues’ (2005) accessible survey is a good introduction to this emergent field.

Although these approaches to understanding the consumer-facing perspective are

varied, 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, management, and choices of

retail financial institutions and the implications for consumer well-being and social wel-

fare. Institutions include depositories, brokerage firms, mutual funds, insurance firms, and

networks of firms (e.g., credit card associations). Institutional work often is pigeonholed

within academic departments or journals specializing in banking, insurance, or real estate.

However, institutions also include peer-to-peer lenders, check cashers, payday lenders,

rent-to-own stores, and pawn shops, as well as governments that sell money orders and

social networks where members lend to one another.

Some research on retail financial institutions deals with their organization and econom-

ics. 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 sharehold-

er performance or customer outcomes? Is a certain business model, such as microfinance,

economically sustainable? For an example of this type of work, a large and reasonably

well-developed literature addresses the fundamental economics of retail investment man-

agement, studying whether certain mutual funds reliably deliver positive risk-adjusted

returns (e.g., Carhart 1997). For a survey of the costs that investors bear searching for

positive performance, see French (2007).

Using this mutual fund work as a springboard, 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. Christoffersen & Musto (2002) and Gil-Bazo & Ruiz-Verdu (2006) find

evidence of strategic price setting by mutual funds, where managers set fees to profit at the

expense of less-alert customers. This line of work highlights the broader issue of how retail

financial institutions deal with their customers. Allen’s (2001) AFA presidential address

focuses on agency conflicts inherent in institutions’ relations with customers, and notes the

inconsistency between corporate finance, which acknowledges these conflicts, and the

neoclassical view of financial institutions, which ignores institutions and the conflicts.

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Scholars studying financial institutions have focused on these conflicts, often looking

for evidence of misaligned incentives between principals and agents in consumer finance

settings. 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. Bergstresser et al. (2009) examine broker-sold mutual funds and find that

funds sold by brokers underperform those sold directly to the consumer, even before

accounting for any distribution charges, and question whether brokers’ incentives are

aligned with those of their customers. Jackson (2009) discusses the general problem of

conflicts of interest in consumer finance distribution channels.

Often, questions about the relationship between firms and their customers relate to

industry competitiveness. The extensive body of industrial organization research on credit

cards asks whether prices are set competitively and whether some parties are systematical-

ly benefited or harmed by the structure of the current two-sided market (Evans & Schma-

lensee 2005). Antitrust questions of this sort, as well as consumer protection issues raised

by other studies naturally leads one to ponder the role of government.

Alternative financial institutions are gaining more attention as well. A recent (still

mostly unpublished) stream of work studies payday lenders, the alternatives against which

they compete, and whether the service they provide helps or harms their customers.

Building off Caskey’s (1996) pioneering work on fringe banking, researchers look at the

relationship between the existence of payday lending and outcomes such as ability to

withstand financial shocks, incidence of bankruptcy, closure of bank accounts for mis-

management, etc. (see working papers by Campbell et al. 2008, Morgan & Strain 2007,

Melzer 2008, Morse 2008, and Skiba & Tobacman 2008).

The Role of Government

Although government plays an important role in regulating many parts of the economy,

consumer finance receives extra attention. Beyond ensuring the system’s safety and sound-

ness, federal and state banking regulation is designed to protect consumer interests. Simi-

larly, the U.S. Securities and Exchange Commission (SEC) mission, in part, is investor

protection. In intent, but perhaps not in practice, some consumer financial businesses are

more closely overseen than other businesses.16

For example, some financial institutions that are entrusted with the money of others

sometimes owe fiduciary duties of loyalty and care. Loyalty refers to putting the client’s

interests ahead of those of the fiduciary, and care refers to the requirement to use reason-

able standards of diligence (for an extensive treatment of this topic, see Frankel 1998,

2006, 2008). Legal scholars and economists have opined about the reasons for these duties

and other rules, as well as how market forces may make them irrelevant. These debates

revolve around circumstances in which caveat emptor—combined with disclosure and

competition—is appropriate, and when stronger rules and regulation are required. For a

16Rather than having specialized regulators, many businesses have relatively lighter and shared oversight. For

example, the Consumer Product Safety Commission oversees more than 15,000 different products with a staff of

420 people (http://www.cpsc.gov/about/faq.html#his). The SEC, sometimes thought to be understaffed, has more

than 3500 full-time staff (http://www.sec.gov/about/secpar/secpar2008.pdf#sec1). Other industries with specialized

regulators charged with consumer protection include foods and drugs and transportation (http://www.cpsc.gov/

federal.html).

SEC: U.S. Securities

and Exchange

Commission

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review of this topic and the empirical work on consumer finance law, see Hynes & Posner

(2002). For a summary of the current law, see the volume by Lampe et al. (2008) including

Hotchkiss & Parker (2008).

As Hynes & Posner’s summary makes clear, the law ensures that consumers have

information, provides insurance against shocks, and bans discrimination. However, the

question is, why would the market not supply these benefits if consumers are willing to

pay for them (Hynes & Posner 2002, p. 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. These issues engender strong debate. For example, Warren (2008a,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. This proposal is one of the key elements of the Obama Adminis-

tration’s reforms of the financial system.

Multi-Party Field Interventions

The taxonomy above categorizes research based on the relevant decision maker, but any

study of consumer finance tends to involve multiple parties (consumers, businesses, and

the government). The taxonomy also does not differentiate by research method. 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. This testing can be

structured in standard control-treatment fashion or as randomized field experiments, 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).

Within consumer finance, these studies apply behavioral economics to induce behavior

changes, so-called “nudges” in Thaler & Sunstein’s (2008) language. In a series of influen-

tial papers, coauthors Choi, Laibson, Madrian, Metrick, and others (Beshears et al. 2008,

2009; Carroll et al. 2009; Choi et al. 2003, 2004a,b, 2009a,b; Laibson et al. 1998)

intervene in employment settings to demonstrate that automatic enrollment features can

dramatically increase participation in workplace savings plans. This work led to changes

in the pension law to facilitate auto-enrollment programs. Thaler & Benartzi’s (2004) Save

More TomorrowTM (SMarT) experiment gave workers the ability to commit today to save

part of their future salary increases, and has been rolled out by Vanguard in the United

States and by AXA in Europe. Beverly and colleagues’ (2006) work on tax refunds

demonstrated the potential of paying yourself first using tax refunds, and contributed to

the IRS’s adoption of Form 8888 to simplify saving part of a refund. Tufano (2008) studies

the offer of a simple savings product at tax time, and implications for savings bond policy.

Duflo and colleagues’ (2005) work on the incentive impacts of match funding measured

the effect of increasing match rates on tax-advantaged savings. Ashraf and colleagues’

(2006) work on commitment savings demonstrates that making savings less liquid can

increase the level of household savings. Karlan, Zinman, and others’ field experiments in

South Africa disentangle moral hazard and adverse selection effects by borrowers and the

implications of marketing (Bertrand et al. 2008, Karlan & Zinman 2008). Consumer

finance is amenable to action research, offering laboratories that can generate meaningful

samples to inform business practice and public policy.

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THE STATE OF CONSUMER FINANCE

Researchers in economics and finance study the allocation of scarce resources. In his

economics textbook, Mankiw (2009) notes that the word economy comes from the Greek

word oikonomos, meaning “one who manages a household.” Consumer finance studies

these household managers and the financial choices they make. This review demonstrates

the importance of consumer finance and the work of financial economists, psychologists,

sociologists, policy analysts, industrial organization economists, political scientists, and

legal scholars who seek to understand household decision making. For some researchers,

this sector is merely a convenient laboratory for studying other phenomena (e.g., examin-

ing corporate governance in the mutual fund industry). For others, however, at the core of

the subfield, the primary research focus is to understand how households, businesses, and

governments interact to deliver the financial functions required by consumers that enable

them to allocate money, time, effort, and risk.

The study of household payments, borrowing, saving, and managing risk functions is

complicated. Consumer finance must understand how consumers should and do choose

among their financial alternatives, and research should embrace neoclassical economics,

psychology, sociology, law, and government policy. To understand the economic efficiency

of the consumer finance sector, whether it is acting in the best interests of consumers and

whether it can be delivered in a better way, also requires considerations of industrial

organization, information economics, and technology. The understanding of how consu-

mers and businesses behave should inform policymakers. If there are meaningful conflicts

of interest between businesses and consumers, or limitations in the capacities of consumers

to search for information, analyze it, or make good decisions, then laws and regulations

play an important role. Finally, macroeconomists must be concerned with the consumer

sector, as spending, saving, and borrowing by consumers can fuel, or depress, an economy.

The multidisciplinary nature of consumer finance problems makes them exciting, but

requires substantial boundary spanning. The emerging interest in the field represents a

deeper openness by financial economists to insights from other disciplines. This openness

acknowledges that utility maximization is not a mechanical exercise, but rather that con-

sumer decisions reflect behavioral biases, affect, and nonfinancial elements. Furthermore,

the consumer’s decision is made in the context of a web of relationships with businesses,

laws, regulations, and social networks that shape the decisions and how they are perceived.

The broad benefits of deeper study of consumer finance may be substantial. 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. Conversely, the failure to carefully understand consumer financial decisions can

lead to the problems of insufficient retirement savings, excess leverage, and poorly designed

mortgage products. I list some issues where future research might be able to learn from, and

inform, business practice and public policy below in the Future Issues section.

FUTURE ISSUES

1. Payments. The payment system has evolved from barter, oxen, and seashells to

plastic cards and mobile banking (Evans & Schmalensee 2005). The law of one

price holds that two things with the same payoffs will have the same value, but

does the form of payment affect consumer behavior? The introduction of electronic

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payment systems (cards and mobile or m-banking) provides researchers with

microtransaction data (e.g., Agarwal et al. 2007, or Cole et al. 2008). Can this

information, perhaps combined with geo-data, provide a better understanding of

consumer decision making? Budgeting is tedious, but critical for healthy household

functioning. Can electronic payment systems facilitate real-time budgeting, and

what impact might this have on decision making?

2. Managing risk. Household risk, apart from investment risk aversion, is among

the least explored topics in consumer finance. What is a useful measure of a

household’s current level of risk—its ability to bear financial shocks, and mech-

anisms to cope with risk? Risk products tend to be marketed individually, rather

than as a portfolio related to households’ overall risk profiles. In investing, one

can separate asset allocation and security selection decisions. 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, heating,

etc. Is it possible to create better risk-management products for families?

3. Borrowing and credit. U.S. households have high levels of borrowing and low

levels of savings. Research by Prelec & Simester (2001), among others, finds that

easy access to credit affects spending behavior and willingness to pay. How has

the easy access to credit through credit cards and home equity products changed

household leverage, savings, 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 bank-

ruptcy or loan modification rules to help current families in distress fairly and

efficiently, but also establish appropriate incentives for behavior?

4. Saving and investing. 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. 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.S. population. 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, or alternatively

fun or exciting, to support savings (Tufano & Schneider 2008)?

5. Financial decision making. Consumers need to make a bewildering array of

financial decisions. Offering sensible defaults can dramatically change behavior.

Where else can this technique be applied? Consumers will need to make some

financial decisions in settings where automatic features may be infeasible. What

skills, information, 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)?

DISCLOSURE STATEMENT

I am the co-organizer of the NBER Working Group on Consumer Finance. I am the co-

founder and Chairman of Doorways to Dreams Fund (http://www.d2dfund.org), a non-

profit research and development firm that designs and tests financial innovations to serve

242 Tufano

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low to moderate income families. One of the research projects cited in this piece was

completed by D2D Fund. I also serve on the FDIC’s Advisory Committee on Economic

Inclusion, am a Research Fellow at the Filene Research Institute, and am on a Federal

Reserve Bank of Boston advisory group. All of these organizations have taken public

positions on some of the issues mentioned in this chapter.

ACKNOWLEDGMENTS

I thank Andrea Ryan for her outstanding research assistance on this project. I benefited

from many conversations on this topic over the years with Dennis Campbell, John Camp-

bell, Shawn Cole, Howell Jackson, Annamaria Lusardi, Asis Martinez-Jerez, Robert

C. Merton, and Daniel Schneider; my students at HBS; and my colleagues at D2D Fund,

the FDIC, and the Filene Research Institute. I am grateful for funding by the HBS Division

of Research and Faculty Development.

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0.0

0.5

1.0

1.5

2.0

2.5

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

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2009

Liabili�es/Assets Mortgage Debt Consumer Debt Savings Rate

Figure 1

Consumer debt and savings rates, 1959Q1-2009Q1 (1959 = 1). Debt data are from the Federal Reserve’s Flow of Funds for

households and non-profits. Mortgage Debt is the ratio of mortgage liability to household real estate values. Consumer Debt

is the ratio of consumer revolving and non-revolving debt to disposable personal income (DPI). The savings rate is based on theU.S. Bureau of Economic Analysis’ National Income and Product Accounts (NIPA) and represents the ratio of personal saving to

DPI. Data can be found at http://research.stlouisfed.org/fred2/data/PSAVERT.txt. Ratios as of 2009 Q1 were as follows:

Liabilities/assets (2.2), mortgage debt (2.2), consumer debt (1.6), and savings rate (0.7).

www.annualreviews.org � Consumer Finance C-1

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Annual Review of

Financial Economics

Contents

Preface to the Annual Review of Financial Economics

Andrew W. Lo and Robert C. Merton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

An Enjoyable Life Puzzling Over Modern Finance Theory

Paul A. Samuelson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Credit Risk Models

Robert A. Jarrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

The Term Structure of Interest Rates

Robert A. Jarrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Financial Crises: Theory and Evidence

Franklin Allen, Ana Babus, and Elena Carletti . . . . . . . . . . . . . . . . . . . . . . 97

Modeling Financial Crises and Sovereign Risks

Dale F. Gray. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

Never Waste a Good Crisis: An Historical Perspective on

Comparative Corporate Governance

Randall Morck and Bernard Yeung . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Capital Market-Driven Corporate Finance

Malcolm Baker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

Financial Contracting: A Survey of Empirical Research and

Future Directions

Michael R. Roberts and Amir Sufi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207

Consumer Finance

Peter Tufano . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

Life-Cycle Finance and the Design of Pension Plans

Zvi Bodie, Jerome Detemple, and Marcel Rindisbacher . . . . . . . . . . . . . . 249

Finance and Inequality: Theory and Evidence

Asli Demirguc-Kunt and Ross Levine . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287

Volume 1, 2009

v

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Volatility Derivatives

Peter Carr and Roger Lee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319

Estimating and Testing Continuous-Time Models in Finance:

The Role of Transition Densities

Yacine Aıt-Sahalia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341

Learning in Financial Markets

Lubos Pastor and Pietro Veronesi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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.annualreviews.org

vi Contents

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