Positive Versus Normative Approaches to Life Cycle Saving and Spending

Positive household finance attempts to describe, explain, and perhaps predict behavior. Some researchers have analyzed household survey data to estimate household preferences, which then could be used as the basis for prescriptions for household behavior. In order to prescribe actions or policies for individuals (e.g., Findley & Caliendo, 2008) or evaluate whether households are making mistakes (e.g., Calvet, Campbell, & Sondini, 2007; Cocco, Gomes, & Mahenhout, 2005) it is necessary to use either analysis of actual choices or of choices between hypothetical alternatives in order to rigorously derive household preference parameters. I think that it is too challenging to model household behavior realistically, so inference of preference parameters from household decisions, e.g., from the equity premium, is not useful. Therefore I will focus on use of simple hypothetical examples to try to estimate plausible values of preference parameters to use for prescriptions for household financial decisions