Your Age & Your Wallet
How old are you today?
You answer to this question would have explained why you are good or bad in personal finance decision-making.
This is at least according to 4 young economists in their recent research findings. The 4 economists are David Laibson of Harvard, Xavier Gabiax of MIT, John C. Driscoll of the Federal Reserve Board and Sumit Agarwal of the Federal Reserve Bank of Chicago. Together they looked at 75,000 home equity loans (refinancing) made in 2002 and compared the borrowers’ interest rates and their age. What they found was that the middle-aged adults tend to borrow at lower interest rates and pay lower fees than younger and older adults – i.e. got the best deal. A similar pattern also observed in credit card usage, younger and older credit-card users are more frequent being panelized for late payment, over limit, cash advance and others form of charges than the middle-aged adults.
Yes, the common sense is that younger adults are probably not very savvy when it comes to their personal finance as they are still learning. But what about the older adults, have it not that their rich life experiences would have certainly made them a better decision makers?
Analytical skill and experiential capital
It turns out whether we are a good or bad in making financial decision depends on two opposing human development trait as we aged - one that deteriorate and another one improving. The one that deteriorates as we aged is our analytical skill (cognitive). In general, our analytical capability declined steadily starting at 20. However, this declining capability is partially offset by the gain of ‘experiential capital,’ the savvy that grows with experience.
So these economists hypothesized that when we hit the middle age, the two lines met. This is where the decision-making is at its peak – the declining of analytical skill is ‘compensates’ by the increasing experience savvyness. At younger age, we have the analytical skills but let down by lacks of experience. At the older age, we have the experience but loss the cognitive capability.
I love this finding as it would has at least alleviate my guilt on making those dump financial mistake over the years, well my younger years. But by the age 53, that is where the analytical and experience met according to the researchers, I will be at my peak in personal finance decision-making. Seriously though, it the finding is true, it would impacts how finance product such as health care insurance, unit trust, and housing loan should be marketed and sold.
Low-entry cost home loan
So now consider this: a bank promoting its housing loan to young working graduates. The loan offers a high loan amount but with low initial repayment period. The bank urges these young graduate to take up the loan as over time, their income will raised as they progress steadily in their career and thus would be able to keep up with the loan repayment. If taking up such low-entry loan good decisions? Try using your analytical and experience skill!