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Dementia Risk and Financial Decision Making by Older Households: The Impact of Information

Year: 2013

Type: article

Abstract: The knowledge and reasoning ability needed to manage one's finances is a form of human capital. Alzheimer's disease and other dementias cause progressive declines in cognition that lead to a complete loss of functional capacities. In this paper we analyze the impact of information about cognitive decline on the choice of household financial decision-maker. Using longitudinal data on older married couples in a novel application of survival analysis, we find that as the financial decision maker's cognition declines, the management of finances is eventually turned over to his cognitively intact spouse, often well after difficulties handling money have already emerged. However, a memory disease diagnosis increases the hazard of switching the financial respondent by over 200 percent for couples who control their retirement accounts, like 401(k) accounts, relative to those who passively receive retirement income. This finding is consistent with a model of the value of information: households with the most to gain financially from preparation are most responsive to information about cognitive decline.

Source: Journal of Human Capital

DOI: 10.1086/674105

Authors: Joanne W. Hsu, Robert Willis

Institutions: Federal Reserve Board of Governors, University of Michigan

Language: English

Topic: Financial Literacy, Pension, Retirement Analysis

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

Funder: National Institute on Aging

Awards: Behaviors on Surveys and in the Economy: HRS and Beyond, Health and Retirement Study: Yrs 35-40