NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Time is Money: Life Cycle Rational Inertia and Delegation of Investment Management

Hugh H. Kim, Raimond Maurer, Olivia S. Mitchell

NBER Working Paper No. 19732
Issued in December 2013
NBER Program(s):   AG   LS

We investigate the theoretical impact of including two empirically-grounded insights in a dynamic life cycle portfolio choice model. The first is to recognize that investors incur opportunity costs in terms of current and future human capital accumulation when managing their own financial wealth, particularly if human capital is acquired via learning by doing. The second is that we incorporate age-varying efficiency patterns in financial decision making. Both enhancements produce inactivity in portfolio adjustment patterns consistent with empirical evidence. We also analyze individuals’ optimal choice between self-managing their wealth versus delegating the task to a financial advisor. Delegation proves most valuable to 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.

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Document Object Identifier (DOI): 10.3386/w19732

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