Time is money: Rational life cycle inertia and the delegation of investment management

Many households display inertia in investment management over their life cycles. Our calibrated dynamic life cycle portfolio choice model can account for such an apparently ‘irrational’ outcome, by incorporating the fact that investors must forgo acquiring job-specific skills when they spend time ma...

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Bibliographic Details
Published in:Journal of financial economics 2016-08, Vol.121 (2), p.427-447
Main Authors: Kim, Hugh Hoikwang, Maurer, Raimond, Mitchell, Olivia S.
Format: Article
Language:English
Subjects:
Asset management
Decision making models
Delegation of authority
Financial advice
Household finance
Human capital
Investment advisors
Investment policy
Life cycle saving
Portfolio inertia
Studies
Welfare economics
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Summary:Many households display inertia in investment management over their life cycles. Our calibrated dynamic life cycle portfolio choice model can account for such an apparently ‘irrational’ outcome, by incorporating the fact that investors must forgo acquiring job-specific skills when they spend time managing their money, and their efficiency in financial decision making varies with age. Resulting inertia patterns mesh well with findings from prior studies and our own empirical results from Panel Study of Income Dynamics (PSID) data. We also analyze how people optimally choose between actively managing their assets versus delegating the task to financial advisors. Delegation proves valuable to both the young and the old. Our calibrated model quantifies welfare gains from including investment time and money costs as well as delegation in a life cycle setting.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2016.03.008