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The age of reason: financial decisions over the lifecycle

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Abstract

The sophistication of financial decisions varies with age: middle-aged adults borrow at lower interest rates and pay fewer fees compared to both younger and older adults. We document this pattern in ten financial markets. The measured effects cannot be explained by observed risk characteristics. The sophistication of financial choices peaks around age 53 in our cross-sectional data. Our results are consistent with the hypothesis that financial sophistication rises and then falls with age, although the patterns that we observe represent a mix of age effects and cohort effects.

Suggested Citation

  • Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David I. Laibson, 2007. "The age of reason: financial decisions over the lifecycle," Working Paper Series WP-07-05, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-07-05
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    More about this item

    Keywords

    Financial institutions; Loans;

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G2 - Financial Economics - - Financial Institutions and Services
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination

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