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

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

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.

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File URL: http://dash.harvard.edu/bitstream/handle/1/4554335/Laibson_AgeofReason.pdf
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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 4554335.

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Date of creation: 2009
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Publication status: Published in Brookings Papers on Economic Activity
Handle: RePEc:hrv:faseco:4554335
Contact details of provider: Postal: Littauer Center, Cambridge, MA 02138
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Web page: http://www.economics.harvard.edu/

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  1. Daniel J. Benjamin & Sebastian A. Brown & Jesse M. Shapiro, 2013. "Who Is ‘Behavioral’? Cognitive Ability And Anomalous Preferences," Journal of the European Economic Association, European Economic Association, vol. 11(6), pages 1231-1255, December.
  2. Choi, James & Madrian, Brigitte & Laibson, David I., 2010. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Scholarly Articles 4686775, Harvard University Department of Economics.
  3. Ulrike Malmendier & Stefan Nagel, 2009. "Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?," NBER Working Papers 14813, National Bureau of Economic Research, Inc.
  4. Rani Spiegler, 2005. "The Market for Quacks," Levine's Bibliography 784828000000000634, UCLA Department of Economics.
  5. Laibson, David I. & Gabaix, Xavier, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
  6. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2008. "Learning in the Credit Card Market," NBER Working Papers 13822, National Bureau of Economic Research, Inc.
  7. Paul Heidhues & Botond Koszegi, 2010. "Exploiting Naivete about Self-Control in the Credit Market," American Economic Review, American Economic Association, vol. 100(5), pages 2279-2303, December.
  8. Pablo Antolín & Colin Pugh & Fiona Stewart, 2008. "Forms of Benefit Payment at Retirement," OECD Working Papers on Insurance and Private Pensions 26, OECD Publishing.
  9. Beshears, John & Laibson, David I. & Madrian, Brigitte C. & Choi, James J., 2012. "Simplification and Saving," Scholarly Articles 9925399, Harvard University Department of Economics.
  10. Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2005. "Information Acquisition: Experimental Analysis of a Boundedly Rational Model," Levine's Bibliography 666156000000000480, UCLA Department of Economics.
  11. John Helliwell & Haifang Huang, 2011. "Well-Being and Trust in the Workplace," Journal of Happiness Studies, Springer, vol. 12(5), pages 747-767, October.
  12. Bruce A. Weinberg & David W. Galenson, 2005. "Creative Careers: The Life Cycles of Nobel Laureates in Economics," NBER Working Papers 11799, National Bureau of Economic Research, Inc.
  13. Annamaria Lusardi & Olivia Mitchell, 2006. "Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education Programs," Working Papers wp144, University of Michigan, Michigan Retirement Research Center.
  14. James J. Choi & David Laibson & Brigitte C. Madrian, 2005. "$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans," NBER Working Papers 11554, National Bureau of Economic Research, Inc.
  15. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
  16. Geng Li, 2014. "Information Sharing and Stock Market Participation: Evidence from Extended Families," The Review of Economics and Statistics, MIT Press, vol. 96(1), pages 151-160, March.
  17. Richard Thaler & Shlomo Benartzi, 2004. "Save more tomorrow: Using behavioral economics to increase employee saving," Natural Field Experiments 00337, The Field Experiments Website.
  18. David Galenson, 2009. "Old masters and young geniuses: The two life cycles of human creativity," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 1-9, May.
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