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

Hugh Hoikwang Kim, Raimond Maurer and Olivia Mitchell

Journal of Financial Economics, 2016, vol. 121, issue 2, 427-447

Abstract: 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.

Keywords: Portfolio inertia; Life cycle saving; Household finance; Human capital; Financial advice (search for similar items in EconPapers)
JEL-codes: D14 D91 G11 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (47)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:121:y:2016:i:2:p:427-447

DOI: 10.1016/j.jfineco.2016.03.008

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