Working Paper: NBER ID: w19732
Authors: Hugh Hoikwang Kim; Raimond Maurer; Olivia S. Mitchell
Abstract: This paper incorporates two empirically-grounded insights into a dynamic life cycle portfolio choice model: the fact that investors forego the opportunity to accumulate job-specific skills when they spend time managing their own money, and the observation that efficiency in financial decision making varies with age. Our calibrated model demonstrates that both factors generate sensible portfolio inactivity patterns consistent with empirical evidence. 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.
Keywords: investment management; portfolio inertia; financial advisors; life cycle model; delegation
JEL Codes: D1; D11; D12; D13; D14; D91; G11; J14; J22; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| age (J14) | portfolio inertia (G11) |
| opportunity costs of time (J22) | portfolio management strategies (G11) |
| mortality risk and decision-making inefficiencies (D91) | portfolio inertia (G11) |
| delegation to financial advisors (G29) | portfolio inertia (G11) |
| delegation to financial advisors (G29) | active self-management (M54) |
| delegation to financial advisors (G29) | lifetime welfare (I38) |
| age (J14) | opportunity costs of time (J22) |