Time is Money: Life Cycle Rational Inertia and Delegation of Investment Management
57 Pages Posted: 13 Dec 2013 Last revised: 2 Jun 2023
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Time Is Money: Rational Life Cycle Inertia and the Delegation of Investment Management
Date Written: December 2013
Abstract
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.
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