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The age of reason: financial decisions over the lifecycle

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  • Sumit Agarwal
  • John C. Driscoll
  • Xavier Gabaix
  • David Laibson

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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-07-05.

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Date of creation: 2007
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Handle: RePEc:fip:fedhwp:wp-07-05

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Keywords: Financial institutions ; Loans;

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