Time is Money: Life Cycle Rational Inertia and Delegation of Investment Management
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.
The authors are grateful for research support provided by NIH/NIA Grant # P30 AG12836 and NIH/NICHD Population Research Infrastructure Program R24 HD-044964, and the Pension Research Council/Boettner Center for Pensions and Retirement Security at the University of Pennsylvania. The authors also received research funding from the Metzler Exchange Professor program at the Goethe University of Frankfurt and the Special Research Fund at the SKK GSB, SKK (Sungkyunkwan) University. Without implicating them, we appreciate helpful comments from Santosh Anagol, Alex Gelber, Itay Goldstein, Dana Kiku, David Love, Jialun Li, David Musto, Stijn Van Nieuwerburgh, Greg Nini, Kent Smetters, Robert Stambaugh, Jeremy Tobacman, Steve Utkus, Jacqueline Wise, and Jessica Wachter. The Wharton High Performance Computing Platform provided an excellent setting for our main numerical analysis. All opinions, findings, interpretations, and conclusions represent the views of the authors and not those of the affiliated institutions or the National Bureau of Economic Research.
Olivia S. Mitchell
Mitchell serves as a Trustee for the Wells Fargo Advantage Funds and has received more than $10,000 from the TIAA-CREF Institute and RAND for research studies on retirement security.
Hugh Hoikwang Kim & Raimond Maurer & Olivia S. Mitchell, 2016. "Time is money: Rational life cycle inertia and the delegation of investment management," Journal of Financial Economics, vol 121(2), pages 427-447.