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  3. American Economic Review: Insights
  4. March 2023
  5. Cognitive Decline, Limited Awareness, Imperfect Agency, and Financial Well-Being

Cognitive Decline, Limited Awareness, Imperfect Agency, and Financial Well-Being

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Abstract

Cognitive decline may lead older Americans to make poor financial decisions. Preventing poor decisions may require timely transfer of financial control to a reliable agent. Cognitive decline, however, can develop unnoticed, creating the possibility of suboptimal timing of the transfer of control. This paper presents survey-based evidence that older Americans with significant wealth regard suboptimal timing of the transfer of control, in particular delay due to unnoticed cognitive decline, as a substantial risk to financial well-being. This paper provides a theoretical framework to model such a lack of awareness and the resulting welfare loss.

Citation

Ameriks, John, Andrew Caplin, Minjoon Lee, Matthew D. Shapiro, and Christopher Tonetti. 2023. "Cognitive Decline, Limited Awareness, Imperfect Agency, and Financial Well-Being." American Economic Review: Insights, 5 (1): 125-40. DOI: 10.1257/aeri.20210711

Additional Materials

JEL Classification

  • G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
  • G53 Household Finance: Financial Literacy
  • H55 Social Security and Public Pensions
  • J14 Economics of the Elderly; Economics of the Handicapped; Non-labor Market Discrimination
  • J26 Retirement; Retirement Policies
  • J32 Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions