Consumer finance examines how consumers make decisions about borrowing, saving, and managing risk. The goal of this course is to learn how to think critically about these decisions. We will learn concepts such as time value of money, risk, and consumption smoothing. We will examine the markets for credit (credit cards, student loans, mortgages), saving/investment (mutual funds, retirement plans, annuities), insurance and financial advice. We will ask why these markets sometimes fail and how regulation can help. Finally, we will examine how psychological biases influence consumers’ financial decisions and how private and public sectors can help in achieving better outcomes. This course is not just about how to manage your personal finances. It is about understanding consumers’ needs and identifying opportunities for better products and services.
A number of factors make consumer finance an increasingly important topic. First, traditional pensions are rapidly being replaced by 401k type of retirement plans. While traditional pensions placed the burden of managing retirement savings on the employer, 401k plans place that burden on the employee. Second, the financial sector offers increasingly complex products - from adjustable rate mortgages to equity-indexed annuities. The vast majority of public is unprepared for managing their finances – one study finds that only 65% of Americans can calculate compound interest. Third, new research in economics and psychology finds that humans suffer from biases that lead to sub-optimal financial decisions – we all want to save more, just not today. Finally, the financial crisis of 2008-2009 highlighted the importance of regulation and risk management not just for large financial institutions but for households as well – the newly established Consumer Financial Protection Bureau is recognition of the need to regulate consumer finance.