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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dc.contributor.author Laibson, David I.
dc.contributor.author Agarwal, Sumit
dc.contributor.author Driscoll, John C.
dc.contributor.author Gabaix, Xavier
dc.date.accessioned 2010-11-15T18:44:25Z
dc.date.issued 2009
dc.identifier.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. en_US
dc.identifier.issn 0007-2303 en_US
dc.identifier.uri http://nrs.harvard.edu/urn-3:HUL.InstRepos:4554335
dc.description.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. en_US
dc.description.sponsorship Economics en_US
dc.language.iso en_US en_US
dc.publisher Brookings Institution Press en_US
dc.relation.isversionof doi:10.1353/eca.0.0067 en_US
dc.relation.hasversion http://ssrn.com/abstract=973790 en_US
dash.license OAP
dc.subject household finance en_US
dc.subject aging en_US
dc.subject financial sophistication en_US
dc.subject shrouding en_US
dc.subject credit cards en_US
dc.subject fees en_US
dc.subject mortgages en_US
dc.subject regulation en_US
dc.title The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation en_US
dc.type Journal Article en_US
dc.description.version Author's Original en_US
dc.relation.journal Brookings Papers on Economic Activity en_US
dash.depositing.author Laibson, David I.
dc.date.available 2010-11-15T18:44:25Z

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  • FAS Scholarly Articles [6464]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University

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