Household Portfolios.

Abstract

The main message of this book is that modelling individual portfolio choice and allowing for individual heterogeneity is crucial to understanding the behaviour of financial markets. The book is very convincing in highlighting both the positive and negative aspects to this message. The main positive aspect is that data on individual portfolios shows systematic patterns that we would miss in aggregation; the main negative aspect is that theory and simulations of individual portfolio choice have only limited success in explaining these patterns, and in particular, in explaining the limited participation in holding risky assets. The book is divided into two parts. The first part discusses theoretical conclusions and methodological issues in analysing portfolio choice; the second part, presents empirical evidence on portfolios in a number of countries (US, UK, Germany, Italy and the Netherlands) and further details on the portfolios of the rich and the elderly in the US. The two parts of the book are remarkably well integrated: the theory discusses possible explanations for the empirical puzzles, and the empirical papers each highlight clearly where the data differs from the predictions of the theory.