Stochastic Goals in Household Financial Planning

Abstract

In household financial planning two types of risk are usually taken into account, that is – life-length risk and risk connected with financing. There are no research in which stochastic nature of the very financial goals is considered. Risk factors in this area may be different depending on the kind of financial goal. Goal magnitude or feasible time of accomplishment may be mentioned as examples.In this article there is presented a proposition of working the time and magnitude distribution into household financial plan optimization. A model of 2-person household is used, where the value function is composed of expected discounted utilities of consumption and bequest. The function takes on as arguments consumption-investment proportion and division of household investments between household members. These are at the same time decision variables of the optimization task.