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Sources of Lower Financial Decision-making Ability at Older Ages

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Listed:
  • Shachar Kariv

    (University of California-Berkeley)

  • Dan Silverman

    (Arizona State University)

Abstract

After middle age, further aging is associated with lower levels of many cognitive abilities, some of which could influence import economic decisions. Our prior research (Choi et al., 2014) shows a substantial negative relationship between age and the consistency of choices with economic rationality (decisionmaking quality). This paper investigates the sources of that negative correlation using panel data on more than 4,000 members of a panel study in the Netherlands. The analysis finds no evidence that the correlation between age and rationality is, in fact, a just a cohort, not an age effect. Similarly, there is little evidence that the correlation is due to other forms of cognitive or health declines. Rather, the findings indicate that age has an independent and negative effect on economic rationality.

Suggested Citation

  • Shachar Kariv & Dan Silverman, 2015. "Sources of Lower Financial Decision-making Ability at Older Ages," Working Papers wp335, University of Michigan, Michigan Retirement Research Center.
    • Handle: RePEc:mrr:papers:wp335
    as

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    References listed on IDEAS

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    3. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2007. "The Age of Reason: Financial Decisions Over the Lifecycle," NBER Working Papers 13191, National Bureau of Economic Research, Inc.
    4. Jason Abaluck & Jonathan Gruber, 2011. "Choice Inconsistencies among the Elderly: Evidence from Plan Choice in the Medicare Part D Program," American Economic Review, American Economic Association, vol. 101(4), pages 1180-1210, June.
    5. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2009. "The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 51-117.
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    7. Laibson, David I. & Agarwal, Sumit & Driscoll, John C. & Gabaix, Xavier, 2009. "The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation," Scholarly Articles 4554335, Harvard University Department of Economics.
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