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Dementia risk and financial decision making by older households: the impact of information

  • Joanne W. Hsu
  • Robert J. Willis

The knowledge and reasoning ability needed to manage one's finances is a form of human capital. Alzheimer's disease and other dementias cause progressive declines in cognition that lead to a complete loss of functional capacities. In this paper we analyze the impact of information about cognitive decline on the choice of household financial decision-maker. Using longitudinal data on older married couples, we find that as the financial decision maker's cognition declines, the management of finances is eventually turned over to his cognitively intact spouse, often well after difficulties handling money have already emerged. However, a memory disease diagnosis increases the hazard of switching the financial respondent by over 200% for couples who control their retirement accounts (like 401ks) relative to those who passively receive retirement income. This is consistent with a model of the value of information: households with the most to gain financially from preparation are most responsive to information about cognitive decline.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-45.

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Date of creation: 2013
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Handle: RePEc:fip:fedgfe:2013-45
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  1. Daniel J. Benjamin & Sebastian A. Brown & Jesse M. Shapiro, 2006. "Who is “Behavioral”? Cognitive Ability and Anomalous Preferences," Levine's Working Paper Archive 122247000000001334, David K. Levine.
  2. Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory And Anticipatory Feelings," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 55-79, February.
  3. James P. Smith & John J. McArdle & Robert Willis, 2010. "Financial Decision Making and Cognition in a Family Context," Working Papers 785, RAND Corporation Publications Department.
  4. Koszegi, Botond, 2003. "Health anxiety and patient behavior," Journal of Health Economics, Elsevier, vol. 22(6), pages 1073-1084, November.
  5. Eileen M. Crimmins & Jung Ki Kim & Kenneth M. Langa & David R. Weir, 2011. "Assessment of Cognition Using Surveys and Neuropsychological Assessment: The Health and Retirement Study and the Aging, Demographics, and Memory Study," Journals of Gerontology: Series B, Gerontological Society of America, vol. 66(suppl_1), pages i162-i171.
  6. James Banks & Zoë Oldfield, 2006. "Understanding pensions: cognitive function, numerical ability and retirement saving," IFS Working Papers W06/05, Institute for Fiscal Studies.
  7. James Banks & Cormac O'Dea & Zoë Oldfield, 2010. "Cognitive Function, Numeracy and Retirement Saving Trajectories," Economic Journal, Royal Economic Society, vol. 120(548), pages F381-F410, November.
  8. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2009. "The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 51-117.
  9. Michael A. Boozer & Tomas J. Philipson, 2000. "The Impact of Public Testing for Human Immunodeficiency Virus," Journal of Human Resources, University of Wisconsin Press, vol. 35(3), pages 419-446.
  10. Adeline Delavande & Susann Rohwedder & Robert Willis, 2008. "Preparation for Retirement, Financial Literacy and Cognitive Resources," Working Papers wp190, University of Michigan, Michigan Retirement Research Center.
  11. Rebecca L. Thornton, 2008. "The Demand for, and Impact of, Learning HIV Status," American Economic Review, American Economic Association, vol. 98(5), pages 1829-63, December.
  12. Laibson, David I. & Agarwal, Sumit & Driscoll, John C. & Gabaix, Xavier, 2009. "The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation," Scholarly Articles 4554335, Harvard University Department of Economics.
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