Authors: Sumit Agarwal, Xavier Gabaix, John C. Driscoll, David Laibson
Publication: Brookings Papers on Economic Activity, Fall 2009
Abstract: 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.