Abstract

http://ssrn.com/abstract=973790
 
 

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The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation


Sumit Agarwal


National University of Singapore

John C. Driscoll


Federal Reserve Board - Division of Monetary Affairs

Xavier Gabaix


New York University - Stern School of Business; 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)

October 19, 2009


Abstract:     
Many consumers make poor financial choices and older adults are particularly vulnerable to such errors. About half of the population between ages 80 and 89 either has dementia or a medical diagnosis of "cognitive impairment without dementia." We study lifecycle patterns in financial mistakes using a proprietary database that measures ten different types of credit behavior. Financial mistakes include suboptimal use of credit card balance transfer offers, misestimation of the value of one's house, and excess interest rate and fee payments. In a cross-section of prime borrowers, middle-aged adults make fewer financial mistakes than younger and older adults. We conclude that financial mistakes follow a U-shaped pattern, with the cost-minimizing performance occurring around age 53. We analyze regulatory regimes that may help individuals avoid making financial mistakes. Some of these regimes are designed to address the particular challenges faced by older adults, but much of our discussion is relevant for all vulnerable populations. We discuss disclosure, nudges, financial driving licenses, advanced directives, fiduciaries, asset safe harbors, ex-post and ex-ante regulatory oversight. Finally, we pose seven questions for future research on cognitive limitations and associated policy responses.

Number of Pages in PDF File: 76

Keywords: Household finance, aging, financial sophistication, shrouding, credit cards, fees, mortgages, regulation

JEL Classification: D1, D4, D8, G2, J14

working papers series


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Date posted: March 29, 2008 ; Last revised: October 22, 2009

Suggested Citation

Agarwal, Sumit and Driscoll, John C. and Gabaix, Xavier and Laibson, David, The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation (October 19, 2009). Available at SSRN: http://ssrn.com/abstract=973790 or http://dx.doi.org/10.2139/ssrn.973790

Contact Information

Sumit Agarwal (Contact Author)
National University of Singapore ( email )
15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)
HOME PAGE: http://www.ushakrisna.com
John C. Driscoll
Federal Reserve Board - Division of Monetary Affairs ( email )
20th and C Streets, NW
Washington, DC 20551
United States
Xavier Gabaix
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
HOME PAGE: http://pages.stern.nyu.edu/~xgabaix/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
David I. Laibson
Harvard University - Department of Economics ( email )
Littauer Center
Room M-14
Cambridge, MA 02138
United States
617-496-3402 (Phone)
617-495-8570 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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