Business Economics and Public Policy Papers

Document Type

Journal Article

Date of this Version

8-2016

Publication Source

Journal of Financial Economics

Volume

121

Issue

2

Start Page

427

Last Page

447

DOI

10.1016/j.jfineco.2016.03.008

Abstract

Many households display inertia in investment management over their life cycles. Our calibrated dynamic life cycle portfolio choice model can account for such an apparently ‘irrational’ outcome, by incorporating the fact that investors must forgo acquiring job-specific skills when they spend time managing their money, and their efficiency in financial decision making varies with age. Resulting inertia patterns mesh well with findings from prior studies and our own empirical results from Panel Study of Income Dynamics (PSID) data. We also analyze how people optimally choose between actively managing their assets versus delegating the task to financial advisors. Delegation proves valuable to both the young and the old. Our calibrated model quantifies welfare gains from including investment time and money costs as well as delegation in a life cycle setting.

Comments

© 2016. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

portfolio inertia, life cycle saving, household finance, human capital, financial advice

Embargo Date

4-6-2018

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Date Posted: 27 November 2017

This document has been peer reviewed.