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The sophistication of financial decisions varies with age. 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 effects.

Last Updated: 06/07/2007

The Age of Reason: Financial Decisions Over the Life Cycle

Sumit Agarwal, John C. Driscoll, Xavier Gabaix , David Laibson

 

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.