Faculty of Economics and Business Administration Publications Database

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

Hoikwang Kim, Hugh
Mitchell, Olivia S.
Volume: 121
Number: 2
Pages: 427 - 447
Month: August
ISSN-Print: 0304-405X
Link External Source: Online Version
Year: 2016
Keywords: Portfolio inertia; Life cycle saving; Household finance; Human capital; Financial advice

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 forego 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 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.