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

2009

214 citations recorded by the source corpus.

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 have a medical diagnosis of substantial cognitive impairment. We study life-cycle patterns in financial mistakes using a proprietary database with information on 10 types of credit transactions. Financial mistakes include suboptimal use of credit card balance transfer offers and excess interest rate and fee payments. In a cross section of prime borrowers, middle-aged adults made fewer financial mistakes than either younger or older adults. We conclude that financial mistakes follow a U-shaped pattern, with the cost-minimizing performance occurring around age 53. We analyze nine regulatory strategies that may help individuals avoid financial mistakes. We discuss laissez-faire, disclosure, nudges, financial "driver's licenses," advance directives, fiduciaries, asset safe harbors, and ex post and ex ante regulatory oversight. Finally, we pose seven questions for future research on cognitive limitations and associated policy responses.

Subfields: Accounting, Demography, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/88b8b1573303f858b73020e3d2dd5d4b96a7998c

Citations in the corpus

• FINANCIAL LITERACY, FINANCIAL EDUCATION AND ECONOMIC OUTCOMES (2012, unknown): “…2003, Bergstresser & Poterba 2004), paying down a mortgage faster than the amortization schedule requires while failing to contribute to a matched tax-deferred savings account (Amromin et al. 2007), and borrowing fromapayday lenderwhen cheaper sources of credit are available (Agarwal et al. 2009b).”
• Self-Control, Financial Literacy and Consumer Over-Indebtedness (2012, unknown): “These results contribute to the understanding of consumer behaviour in consumer credit markets (Agarwal, Chomsisengphet, Liu, & Souleles, 2006; Agarwal, Gabaix, Driscoll, & Laibson, 2009; Campbell, 2006; Gabaix & Laibson, 2006; Hoezl et al., 2011; Jappelli & Padula, in press; Kapetyn & Teppa, 2011;…”
• Financial Literacy and the Financial Crisis (2012, unknown): “Interestingly, Agarwal et al. (2009) show that financial mistakes are prevalent among the young and the elderly, which are the groups that display the lowest levels of financial knowledge.”
• Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees (2011, unknown): “It is also worth noting that the distribution of our 31 Agarwal et al (2009) is a nice exception, drawing on administrative data from multiple financial institutions.”
• High School Curriculum and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses (2016, unknown): “A growing body of evidence finds that financial mistakes are more likely among thosewithworsemath skills (for example,Agarwal et al. 2009 andAgarwal and Mazumder 2013).”
• Financial literacy and its consequences: Evidence from Russia during the financial crisis (2013, unknown): “Agarwal et al. (2009) show that financial mistakes are prevalent among the young and the elderly, which are the groups that display the lowest levels of financial knowledge.”
• Who Is (More) Rational (2014, unknown): “Agarwal et al. (2009) show a U-shaped age pattern in the frequency of dominated choices regarding the use of credit, with both younger and older consumers more prone to error.2 The possibility that planning skills, financial education, experience or cognitive decline substantially affect the…”
• Household Debt: Facts, Puzzles, Theories, and Policies (2015, unknown): “Agarwal et al (2009) find U-shaped patterns of cost minimization by borrower age.”
• Financial Literacy, Retirement Planning and Household Wealth† (2012, unknown): “Agarwal et al. (2009) provide evidence of financial mistakes in the loan market, with many households paying excessive fees or too-high interest rates on credit card debt, home equity loans and mortgages.”
• Do Consumers Choose the Right Credit Contracts (2015, unknown): “For example, Agarwal et al. (2009, 2013), Agarwal and Mazumdar (2013), Agarwal, Skiba and Tobacman (2009), Bertrand and Morse (2011), Campbell et al. (2011), Choi, Madrian, and Laibson (2012), and Stango and Zinman (2009), among others.”
• Financial literacy and retirement planning in the United States* (2011, unknown): “…between actual and self-assessed knowledge may explain why older people often are offered less financially attractive deals than other groups (Agarwal et al., 2009); this also corroborates Lusardi and Tufano (2009a) who show that older persons display the largest gap between actual and…”