Dementia Risk and Financial Decision Making by Older Households: The Impact of Information

45 Pages Posted: 12 Oct 2013

See all articles by Joanne W. Hsu

Joanne W. Hsu

Board of Governors of the Federal Reserve System

Robert J. Willis

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 1, 2013

Abstract

The knowledge and reasoning ability needed to manage one's finances is a form of human capital. Alzheimer's disease and other dementias cause progressive declines in cognition that lead to a complete loss of functional capacities. In this paper we analyze the impact of information about cognitive decline on the choice of household financial decision-maker. Using longitudinal data on older married couples, we find that as the financial decision maker's cognition declines, the management of finances is eventually turned over to his cognitively intact spouse, often well after difficulties handling money have already emerged. However, a memory disease diagnosis increases the hazard of switching the financial respondent by over 200% for couples who control their retirement accounts (like 401ks) relative to those who passively receive retirement income. This is consistent with a model of the value of information: households with the most to gain financially from preparation are mos t responsive to information about cognitive decline.

Keywords: Household finance, cognition

JEL Classification: D12, J14

Suggested Citation

Hsu, Joanne W. and Willis, Robert J., Dementia Risk and Financial Decision Making by Older Households: The Impact of Information (April 1, 2013). FEDS Working Paper No. 2013-45. Available at SSRN: https://ssrn.com/abstract=2339225 or http://dx.doi.org/10.2139/ssrn.2339225

Joanne W. Hsu (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Robert J. Willis

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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