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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 can not be explained by observed risk characteristics. The sophistication of financial choices peaks at about 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.
Here is the paper.
Posted by Tyler Cowen on May 8, 2007 at 03:37 AM in Economics | Permalink
Comments
Posted by: fasdf at May 8, 2007 4:12:53 AM
What's the modal age that adults begin subscribing to "Modern Maturity" magazine? Is it about 53?
Posted by: mikeKP at May 8, 2007 9:28:12 AM
Does fiscal responsibility drop off with age, or do the more meticulous, stress prone people drop off with age?
Maybe the dumb and happy have better survivorship.
Posted by: aaron at May 8, 2007 10:20:55 AM
Also, at what point are parents likely to take on additional debt on behalf of their children (help with financing school, subsidizing living expepenses during that entry level job, etc.)
Posted by: aaron at May 8, 2007 10:23:41 AM
Does this mean we should select financial professionals under the age of 53???? How about estate planners and trust attorneys over 53? Never trust anyone over the age of 53? An example of research that creates more questions than it answers. But then, isn't that what good research is supposed to do? Create job security for researchers?
Posted by: ciwood at May 8, 2007 10:47:24 AM
Fiscally responsibe people do not do a lot of borrowing after or when nearing retirement age. Maybe the results are due to a selection bias from looking at the percent of loans that are at higher rates not the percent of people in an age group that are borrowing at higher rates.
Posted by: joan at May 8, 2007 11:09:04 AM
Perhaps middle-aged adults seem more financially saavy (i.e. "borrower at lower interest rates and pay fewer fees") because younger borrowers don't have the same opportunities to do the same. I bought my first car at a price of $8,000, put $5k down, and couldn't get a rate lower than 21.5% to finance the rest. This was due in no small part to the fact that I had never borrowed a nickel (in the form of credit) before in my life.
No credit is worse than bad credit: younger borrowers are penalized as a result and, at least according to this analysis, end up appearing less financially sophisticated.
Posted by: sonik at May 8, 2007 4:08:26 PM
When I was working on Wall Street and working with researching analyzing mortgage refinancing, they were examining many factors. The most important factor in the end -- this took a while because of a lack of data -- turned out to be the size of the mortgage. The theory: this directly corresponds to the opportunity cost to refinancing versus both the hassle and up-front cost of refinancing.
Perhaps people who are e.g. 53 just simply tend to have larger debts, and, thus, are far more sensitive to having the cheapest debt they can.
Posted by: Mark Scannell at May 9, 2007 3:42:28 AM
sonik: I went through the same thing. (Though with a home loan, that I turned down, instead of a car.) Bad
credit is a lot worse than no credit. Then when you explain what happened to the credit industry's avid
defenders, they instantly assume you must have "had trouble handling large debt" in the past. Whatever.
Posted by: Person at May 10, 2007 12:05:44 PM
This is consistent with data showing wealth peaking during ages 55-60 on average.
Posted by: Barkley Rosser at May 10, 2007 3:26:27 PM
I personally think that as you are younger there are debts to pay off from school, and starting families of your own. As you get older you want to refurbish the old or get new things. Middle age is where I think most people are content and supply meets demand. They make smarter choices about loans and needs. They do not let the want demand increase so the supply goes down.
Posted by: Susan at May 15, 2007 7:32:29 AM
Very true !!hypothesis that financial sophistication rises and then falls
with age.Its with the age what we analyse.
Posted by: Software Outsourcing at May 22, 2007 7:25:30 AM
People at the middle age are more wiser and realistic which leads to
realistic thinking in terms of finance.
Posted by: Outsourced Product Development Center at May 22, 2007 7:31:08 AM
After the age of 55 no person should be trusted for sophistication in finance.
Posted by: Offshore Software Product Testing at May 22, 2007 7:34:30 AM
I feel the smarter choice about finances is analysed in the middle age only.
supplies are taken care not to exceed the demands.
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