Document Type
Working Paper
Date of this Version
6-2007
Abstract
The sophistication of financial decisions varies with age: middle-aged adults borrow at lower interest rates and pay fewer fees compared to both younger and older adults. We document this pattern in ten financial markets. The measured effects cannot be explained by observed risk characteristics. The sophistication of financial choices peaks around age 53 in our cross-sectional data. Our results are consistent with the hypothesis that financial sophistication rises and then falls with age, although the patterns that we observe represent a mix of age effects and cohort effects.
Keywords
Household finance, behavioral finance, behavioral industrial organization, aging, shrouding, auto loans, credit cards, fees, home equity, mortgages
JEL Code
D1, D4, D8, G2, J14
Working Paper Number
WP2007-13
Disclosure
Gabaix and Laibson acknowledge support from the National Science Foundation (Human and Social Dynamics program). Laibson acknowledges financial support from the National Institute on Aging (R01-AG-1665).
Copyright/Permission Statement
The views expressed in this paper are those of the authors and do not represent the policies or positions of the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of Chicago. Opinions and errors are solely those of the author and not of the institutions with whom the author is affiliated. © 2007 Pension Research Council. All rights reserved.
Acknowledgements
For their comments we thank Marco Basetto, Stephane Bonhomme, David Cutler, Ray Fair, Luigi Guiso, Gur Huberman, Ulrike Malmendier, Mitch Petersen, Rich Rosen, Timothy Salthouse, Fiona Scott Morton, Jesse Shapiro, Paolo Sodini, Nick Souleles, Jon Zinman, and participants at the Bank of Spain, Chicago Fed, the Federal Reserve Board, Princeton, the Institute for Fiscal Studies and the NBER (Aging and Behavioral Economics groups), the Yale Behavioral Economics conference.
Date Posted: 17 December 2019