Cognitive Status, Self-Control, & Asset Decumulation: Evidence from the HRS
23 Pages Posted: 6 Feb 2014
Date Written: February 4, 2014
Evidence suggests cognitive ability is important when making financial decisions. The presence or absence of cognitive ability is important in estimating the likelihood of uncertain events, considering choices in combination across multiple periods, and recognizing the need for commitment to combat inconsistent preferences and deficiencies in self-control. Given the negative relationship between cognitive ability and age, retirees may be affected as their ability in these areas diminishes. Self-control, or a lack there of, may also impact the consistency of preferences and behavior over time. When making asset decumulation decisions retirees are likely influenced by both their long-term concerns and short-term emotions. These competing forces highlight the importance of self-control on one’s ability to carry out long-term consumption goals. Thus, self-control may help explain variation in retirement spending and the risk of asset depletion in old age. We explore the relationship between cognitive status – the presence or absence of notable cognitive decline – self-control, and asset decumulation among retired households in the United States. After controlling for age, initial wealth, stock ownership, and income our findings indicate that cognitive status is important in determining the rate of asset decumulation.
Keywords: cognitive ability, self-control, asset decumulation, retirement
JEL Classification: D12, D81, D91, H31
Suggested Citation: Suggested Citation