The Age of Reason: Financial Decisions Over the Lifecycle

51 Pages Posted: 3 Nov 2008

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

John C. Driscoll

Board of Governors of the Federal Reserve System

Xavier Gabaix

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

David Laibson

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2007

Abstract

The sophistication of financial decisions varies with age: middle-aged adults borrow at lower interest rates and pay fewer fees compared to both younger and older adults. We document this pattern in ten financial markets. The measured effects cannot be explained by observed risk characteristics. The sophistication of financial choices peaks around age 53 in our cross-sectional data. Our results are consistent with the hypothesis that financial sophistication rises and then falls with age, although the patterns that we observe represent a mix of age effects and cohort effects.

Keywords: Household finance, behavioral finance, behavioral industrial organization, aging, shrouding, auto loans, credit cards, fees, home equity, home equity

Suggested Citation

Agarwal, Sumit and Driscoll, John C. and Gabaix, Xavier and Laibson, David I., The Age of Reason: Financial Decisions Over the Lifecycle (June 2007). NYU Working Paper No. FIN-07-005, Available at SSRN: https://ssrn.com/abstract=1293139

Sumit Agarwal

National University of Singapore ( email )

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John C. Driscoll

Board of Governors of the Federal Reserve System ( email )

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HOME PAGE: http://www.federalreserve.gov/econresdata/john-c-driscoll.htm

Xavier Gabaix

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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David I. Laibson

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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