The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation
Social Science Research Network, November 15th, 2009
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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