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

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

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Title: The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation
Author: Laibson, David I.; Agarwal, Sumit; Driscoll, John C.; Gabaix, Xavier

Note: Order does not necessarily reflect citation order of authors.

Citation: Agarwal, Sumit, John C. Driscoll, Xavier Gabaix, and David Laibson. 2009. The age of reason: financial decisions over the life-cycle with implications for regulation. Brookings Papers on Economic Activity 2:51-117.
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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.
Published Version: doi:10.1353/eca.0.0067
Other Sources: http://ssrn.com/abstract=973790
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:4554335

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  • FAS Scholarly Articles [7262]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University
 
 

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