Financial Decisions of Households under Uncertainty

Abstract

Understanding decision making of households has always been a key challenge of economic research. Some of the most relevant household choices are financial decisions regarding savings since these insure household consumption against income shocks and are an important component of retirement income in many countries. Depending on the investment decision (e.g., savings account, housing, or stocks) the household faces a substantial financial risk. A very cautious investment strategy, however, can lead to large forgone gains -- especially in the long-run. The key characteristic of these decision situations is that the returns of some financial investments are uncertain. How households make decisions under this kind of uncertainty, is the motivating question of this thesis. <br> Based on standard economic theory, the risk households take when choosing how to invest their savings, is most importantly determined by the level of risk aversion and wealth. It has been shown, however, that those determinants can neither explain the low levels of stock holding nor the large individual heterogeneity that is observed. This thesis studies three alternative components that might play a role for households' financial decision making: subjective beliefs about the development of the stock market (Chapter 1), loss aversion measured by lottery choices (Chapter 2), and attitudes towards ambiguity (Chapter 3).