The Age of Reason: Financial Decisions Over the Lifecycle
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behavioral finance
behavioral industrial organization
aging
shrouding
auto loans
credit cards
fees
home equity
mortgages
Economics
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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.
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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).