Time Is Money: Rational Life Cycle Inertia and the Delegation of Investment Management

63 Pages Posted: 7 Nov 2013 Last revised: 2 Mar 2019

See all articles by Hugh Hoikwang Kim

Hugh Hoikwang Kim

University of South Carolina, Darla Moore School of Business

Raimond Maurer

Goethe University Frankfurt - Finance Department

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

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Date Written: November 1, 2013

Abstract

Many households display inertia in investment management over their life cycles. Our calibrated dynamic life cycle portfolio choice model can account for such an apparently ‘irrational’ outcome, by incorporating the fact that investors must forego acquiring job-specific skills when they spend time managing their money, and their efficiency in financial decision making varies with age. Resulting inertia patterns mesh well with findings from prior studies and our own empirical results from PSID data. We also analyze how people optimally choose between actively managing their assets versus delegating the task to financial advisors. Delegation proves valuable to both the young and the old. Our calibrated model quantifies welfare gains from including investment time and money costs as well as delegation in a life cycle setting.

Suggested Citation

Kim, Hugh Hoikwang and Maurer, Raimond and Mitchell, Olivia S., Time Is Money: Rational Life Cycle Inertia and the Delegation of Investment Management (November 1, 2013). Journal of Financial Economics (JFE), Forthcoming; Pension Research Council PRC WP2013-33. Available at SSRN: https://ssrn.com/abstract=2350785 or http://dx.doi.org/10.2139/ssrn.2350785

Hugh Hoikwang Kim

University of South Carolina, Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States

Raimond Maurer

Goethe University Frankfurt - Finance Department ( email )

Grüneburgplatz 1
House of Finance
Frankfurt, 60323
Germany

Olivia S. Mitchell (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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