Herzog Young Investigators ' Fund. We are thankful for feedback from Charlie Brown, David La... more Herzog Young Investigators ' Fund. We are thankful for feedback from Charlie Brown, David Lam and Miles Kimball about the Job Seekers Project and its surveys, and we thank Martha Bailey, Trivellore Raghunathan, Jeffrey Smith, and Matthew Shapiro for comments and feedback about this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. This is an Accepted Manuscript of an article forthcoming in The Journal of Economic Education, 2014. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at
We develop a model of portfolio selection with subjective uncertainty and learning in order to ex... more We develop a model of portfolio selection with subjective uncertainty and learning in order to explain why some people hold stocks while others don't. We model heterogeneity in information directly, which is an alternative to the existing explanations that emphasized heterogeneity in transaction costs of investment. We plan to calibrate the model to survey data (when available) on people's perception about the distribution of stock market returns. Our approach also leads to a model of learning with new implications such as zero optimal risky assets, or ex post correlation of uncorrelated labor income and optimal portfolio composition. It also points to two factors in probabilistic thinking that should have a major impact on stock ownership. These are the level and the precision of expectations. We construct proxy measures for the two parameters from the 1992-2000 waves of the Health and Retirement Study (HRS). We use a large battery of the subjective probability questions administered in each wave of HRS to construct an overall "index of optimism" (the correlated factor between all subjective probabilities) and "index of precision" (the fraction of nonfocal probability answers, following Lillard and Willis, 2001). We also construct measures for how people forecast the weather, their cognitive capacity, wealth, and basic demographics. Our results indicate that stock ownership and the probability of becoming a stockholder are strongly positively correlated with the indices of the level and precision of expectations. Interpretation of the former is quite challenging and further research is needed to understand its full content.
Traditional economic models assume that individuals have full information and act perfectly ratio... more Traditional economic models assume that individuals have full information and act perfectly rationally. However, we show that there is considerable variation in financial literacy in the population and propose modeling the acquisition of financial knowledge in a human capital production framework. The model makes several predictions, notably with respect to portfolio choice. For example, it helps explain household non-participation in the stock market for some fraction of the population, and it provides guidance about the share of risky assets to hold for other types of households. Estimation of the human capital production function for financial knowledge on data from the Cognitive Economics Survey yields results that are consistent with important features of the model.
The knowledge and reasoning ability needed to manage one's finances is a form of human capital. A... more 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, 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% for couples who control their retirement accounts (like 401ks) relative to those who passively receive retirement income. This 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.
We analyzed the economic consequences of a husband's death using events that occurred between the... more We analyzed the economic consequences of a husband's death using events that occurred between the first two waves of the HRS and AHEAD studies. We compared poverty transitions against published results from Social Security's Retirement History Survey of the 1970s. Widowhood remains an important risk factor for transition into poverty, although somewhat less so than twenty years ago. Women over age 65 (AHEAD) are less likely to experience severe economic changes than women under age 61 (HRS). Several factors account for the age differences: the declining importance of husband's earnings with age, the rising importance of Social Security benefits, and the occasionally large out-of-pocket medical expenses associated with husband's death before Medicare eligibility. The greater economic impact of widowhood at younger ages is consistent with our cross-section evidence that poverty rates rise with duration of widowhood but are only weakly associated with age.
This paper utilizes a large set of subjective probability questions from the Health and Retiremen... more This paper utilizes a large set of subjective probability questions from the Health and Retirement Survey to construct an index measuring the precision of probabilistic beliefs (PPB) and relates this index to household choices about the riskiness of their portfolios and the rate of growth of their net worth. A theory of uncertainty aversion based on repeated sampling is proposed that resolves the Ellsberg Paradox within a conventional expected utility model. In this theory, uncertainty aversion is implied by risk aversion. This theory is then used to propose a link between an individual's degree of uncertainty and his propensity to give "focal" answers of "0", "50_50" or "100" or "exact" answers to survey questions and the validity of this interpretation is tested empirically. Finally, an index of the precision of probabilistic thinking is constructed by calculating the fraction of probability questions to which each HRS respondent gives a non-focal answer. This index is shown to have a statistically and economically significant positive effect on the fraction of risky assets in household portfolios and on the rate of growth of these assets longitudinally. These results suggest that there is systematic variation in the competence of individuals to manage investment accounts that should be considered in designing policies to create individual retirement accounts in the Social Security system.
This study explores the relationship between general human capital investment, financial knowledg... more This study explores the relationship between general human capital investment, financial knowledge, occupational spillovers, and the accumulation of wealth in a primarily descriptive manner. Drawing upon human capital theory and following previous related work by Delavande, Rohwedder and Willis (2008), we hypothesized that individuals with daily exposure to financial knowledge through their occupation would benefit by having greater financial knowledge that would translate into greater wealth accumulation than individuals who do not enjoy such spillovers from their occupation. Using data from the Cognitive Economics Study and the Health and Retirement Study, we find strong evidence that individuals in financial occupations tend to have greater financial knowledge and moderate evidence that they also have greater wealth accumulation.
We analyze the role of individual's and spouse's survival expectations and knowledge about Social... more We analyze the role of individual's and spouse's survival expectations and knowledge about Social Security rules on the expected Social Security claiming age, taking into account the various incentives faced by single and married individuals. We find that single men and women who expect to be long-lived plan on delaying Social Security claiming. When we allow for differential effects of survival on knowledge about Social Security rules, subjective survivals matter only for single women who are knowledgeable about the penalty associated with early claiming. Knowledge is not so important in the decision of single men. The claiming decision of married individuals is more complicated, as they are entitled to spouse's and survivor's benefits. Consistent with the incentives provided by the institution, we find that married men base their expected claiming age on their spouse's survival expectations but not on their own survival. For married women, both own and spouse's subjective survivals influence positively the timing of claiming. Knowledge about Social Security rules affects the expected claiming age of both married men and women.
This article explores motivations for intergenerational exchanges of time and money using data fr... more This article explores motivations for intergenerational exchanges of time and money using data from Indonesia. The extent of exchange and underlying motivations differ across families but substantial evidence supports the theory that transfers within families serve as insurance for family members. The results also suggest that between some parents and children money is exchanged for time. Additionally, some evidence is consistent with the idea that parents pay for their children's education partly as a loan that is later repaid. The authors compare their results to those that they obtained previously for Malaysia using similar data and methods. The findings regarding motivations for transfers are remarkably similar across the two countries. The family is a critical social institution in providing support to its members. The effects on this support of changes in family structures, such as longer life expectancies and greater diversity of
Caring for the elderly with dementia imposes a substantial burden on family members and likely ac... more Caring for the elderly with dementia imposes a substantial burden on family members and likely accounts for more than half of the total cost of dementia for those living in the community. However, most past estimates of this cost were derived from small, nonrepresentative samples. We sought to obtain nationally representative estimates of the time and associated cost of informal caregiving for the elderly with mild, moderate, and severe dementia. DESIGN: Multivariable regression models using data from the 1993 Asset and Health Dynamics Study, a nationally representative survey of people age 70 years or older (N = 7,443). SETTING: National population-based sample of the community-dwelling elderly. MAIN OUTCOME MEASURES: Incremental weekly hours of informal caregiving and incremental cost of caregiver time for those with mild dementia, moderate dementia, and severe dementia, as compared to elderly individuals with normal cognition. Dementia severity was defined using the Telephone Interview for Cognitive Status.
Alzheimer Disease & Associated Disorders, 2004
The number of older individuals with dementia will likely increase significantly in the next deca... more The number of older individuals with dementia will likely increase significantly in the next decades, but there is currently limited information regarding the out-of-pocket expenditures (OOPE) for medical care made by cognitively impaired individuals and their families. We used data from the 1993 and 1995 Asset and Health Dynamics Study, a nationally representative longitudinal survey of older Americans, to determine the OOPE for individuals with and without dementia. Dementia was identified in 1993 using a modified version of the Telephone Interview for Cognitive Status for self-respondents, and proxy assessment of memory and judgment for proxy respondents. In 1995, respondents reported OOPE over the prior 2 years for: 1) hospital and nursing home stays, 2) outpatient services, 3) home care, and 4) prescription medications. The adjusted mean annual OOPE was 1,350 US dollars for those without dementia, 2,150 US dollars for those with mild/moderate dementia, and 3,010 US dollars for those with severe dementia (p < 0.01). Expenditures for hospital/nursing home care (1,770 per year US dollars) and prescription medications (800 per year US dollars) were the largest OOPE components for those with severe dementia. We conclude that dementia is independently associated with significantly higher OOPE for medical care compared with those with normal cognitive function. Severe dementia is associated with a doubling of OOPE, mainly due to higher payments for long-term care. Given that the number of older Americans with dementia will likely increase significantly in the coming decades, changes in public funding aimed at reducing OOPE for both long-term care and prescription medications would have considerable impact on individuals with dementia and their families.
Since Frank Knight (1921) introduced the distinction, economists have recognized that risk is the... more Since Frank Knight (1921) introduced the distinction, economists have recognized that risk is the special case of uncertainty in which probabilities are known. Based on subjective survival probability questions in the Health and Retirement Study we use an econometric model to ...
Population aging and attendant pressures on public budgets have spurred considerable interest in ... more Population aging and attendant pressures on public budgets have spurred considerable interest in understanding factors that influence retirement timing. A range of sociodemographic and economic characteristics predict both earlier and later retirement. Less is known about the role of job characteristics on the work choices of older workers. Researchers are increasingly using the subjective ratings of job characteristics available in the Health and Retirement Study in conjunction with more objective measures of job characteristics from the Occupational Information Network (O*NET) database. Employing a theoretically-informed model of job demands-personal resources fit, we constructed mismatch measures between resources and job demands (both subjectively and objectively assessed) in physical, emotional, and cognitive domains. When we matched comparable measures across the two data sources in the domains of physical, emotional, and cognitive job demands, we found that both sources of information held predictive power in relation to retirement timing. Physical and emotional but not cognitive mismatch were associated with earlier retirement. We discuss theoretical and practical implications of these findings and directions for future research.
In this chapter we examine the financial situation of married couples with special attention to t... more In this chapter we examine the financial situation of married couples with special attention to the life-contingency structure of the various assets that comprise couples' wealth. The data corne from the Health and Retirement Study (HRS), a survey that provides unusually detailed information on family finances (see Chapter 1). We focus here on 3,362 married women who were age 51-61 in 1992. All statistical results are weighted by the women's person-level sampling weight in the HRS to ensure that the results are nationally representative. Mter describing the methods used to construct household wealth measures, we then compute how much would remain after the death of the husband or the wife, if that death occurred immediately. Next we convert wealth in each of the three possible surviving states into the sustainable annual consumption (annuity) that the couple or widow(er) could achieve. The results are then compared with earlier research on the adequacy of provision for prospective widows. We also compare survivors' sustainable consumption levels to poverty thresholds. This then indicates potential poverty rates in each survival state.
This chapter is the third in a sequence of papers by this team that investigates the implications... more This chapter is the third in a sequence of papers by this team that investigates the implications of the growth of 401(k) plans as the major source of pension wealth in the United States. Since I also served as discussant of the
Herzog Young Investigators ' Fund. We are thankful for feedback from Charlie Brown, David La... more Herzog Young Investigators ' Fund. We are thankful for feedback from Charlie Brown, David Lam and Miles Kimball about the Job Seekers Project and its surveys, and we thank Martha Bailey, Trivellore Raghunathan, Jeffrey Smith, and Matthew Shapiro for comments and feedback about this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. This is an Accepted Manuscript of an article forthcoming in The Journal of Economic Education, 2014. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at
We develop a model of portfolio selection with subjective uncertainty and learning in order to ex... more We develop a model of portfolio selection with subjective uncertainty and learning in order to explain why some people hold stocks while others don't. We model heterogeneity in information directly, which is an alternative to the existing explanations that emphasized heterogeneity in transaction costs of investment. We plan to calibrate the model to survey data (when available) on people's perception about the distribution of stock market returns. Our approach also leads to a model of learning with new implications such as zero optimal risky assets, or ex post correlation of uncorrelated labor income and optimal portfolio composition. It also points to two factors in probabilistic thinking that should have a major impact on stock ownership. These are the level and the precision of expectations. We construct proxy measures for the two parameters from the 1992-2000 waves of the Health and Retirement Study (HRS). We use a large battery of the subjective probability questions administered in each wave of HRS to construct an overall "index of optimism" (the correlated factor between all subjective probabilities) and "index of precision" (the fraction of nonfocal probability answers, following Lillard and Willis, 2001). We also construct measures for how people forecast the weather, their cognitive capacity, wealth, and basic demographics. Our results indicate that stock ownership and the probability of becoming a stockholder are strongly positively correlated with the indices of the level and precision of expectations. Interpretation of the former is quite challenging and further research is needed to understand its full content.
Traditional economic models assume that individuals have full information and act perfectly ratio... more Traditional economic models assume that individuals have full information and act perfectly rationally. However, we show that there is considerable variation in financial literacy in the population and propose modeling the acquisition of financial knowledge in a human capital production framework. The model makes several predictions, notably with respect to portfolio choice. For example, it helps explain household non-participation in the stock market for some fraction of the population, and it provides guidance about the share of risky assets to hold for other types of households. Estimation of the human capital production function for financial knowledge on data from the Cognitive Economics Survey yields results that are consistent with important features of the model.
The knowledge and reasoning ability needed to manage one's finances is a form of human capital. A... more 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, 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% for couples who control their retirement accounts (like 401ks) relative to those who passively receive retirement income. This 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.
We analyzed the economic consequences of a husband's death using events that occurred between the... more We analyzed the economic consequences of a husband's death using events that occurred between the first two waves of the HRS and AHEAD studies. We compared poverty transitions against published results from Social Security's Retirement History Survey of the 1970s. Widowhood remains an important risk factor for transition into poverty, although somewhat less so than twenty years ago. Women over age 65 (AHEAD) are less likely to experience severe economic changes than women under age 61 (HRS). Several factors account for the age differences: the declining importance of husband's earnings with age, the rising importance of Social Security benefits, and the occasionally large out-of-pocket medical expenses associated with husband's death before Medicare eligibility. The greater economic impact of widowhood at younger ages is consistent with our cross-section evidence that poverty rates rise with duration of widowhood but are only weakly associated with age.
This paper utilizes a large set of subjective probability questions from the Health and Retiremen... more This paper utilizes a large set of subjective probability questions from the Health and Retirement Survey to construct an index measuring the precision of probabilistic beliefs (PPB) and relates this index to household choices about the riskiness of their portfolios and the rate of growth of their net worth. A theory of uncertainty aversion based on repeated sampling is proposed that resolves the Ellsberg Paradox within a conventional expected utility model. In this theory, uncertainty aversion is implied by risk aversion. This theory is then used to propose a link between an individual's degree of uncertainty and his propensity to give "focal" answers of "0", "50_50" or "100" or "exact" answers to survey questions and the validity of this interpretation is tested empirically. Finally, an index of the precision of probabilistic thinking is constructed by calculating the fraction of probability questions to which each HRS respondent gives a non-focal answer. This index is shown to have a statistically and economically significant positive effect on the fraction of risky assets in household portfolios and on the rate of growth of these assets longitudinally. These results suggest that there is systematic variation in the competence of individuals to manage investment accounts that should be considered in designing policies to create individual retirement accounts in the Social Security system.
This study explores the relationship between general human capital investment, financial knowledg... more This study explores the relationship between general human capital investment, financial knowledge, occupational spillovers, and the accumulation of wealth in a primarily descriptive manner. Drawing upon human capital theory and following previous related work by Delavande, Rohwedder and Willis (2008), we hypothesized that individuals with daily exposure to financial knowledge through their occupation would benefit by having greater financial knowledge that would translate into greater wealth accumulation than individuals who do not enjoy such spillovers from their occupation. Using data from the Cognitive Economics Study and the Health and Retirement Study, we find strong evidence that individuals in financial occupations tend to have greater financial knowledge and moderate evidence that they also have greater wealth accumulation.
We analyze the role of individual's and spouse's survival expectations and knowledge about Social... more We analyze the role of individual's and spouse's survival expectations and knowledge about Social Security rules on the expected Social Security claiming age, taking into account the various incentives faced by single and married individuals. We find that single men and women who expect to be long-lived plan on delaying Social Security claiming. When we allow for differential effects of survival on knowledge about Social Security rules, subjective survivals matter only for single women who are knowledgeable about the penalty associated with early claiming. Knowledge is not so important in the decision of single men. The claiming decision of married individuals is more complicated, as they are entitled to spouse's and survivor's benefits. Consistent with the incentives provided by the institution, we find that married men base their expected claiming age on their spouse's survival expectations but not on their own survival. For married women, both own and spouse's subjective survivals influence positively the timing of claiming. Knowledge about Social Security rules affects the expected claiming age of both married men and women.
This article explores motivations for intergenerational exchanges of time and money using data fr... more This article explores motivations for intergenerational exchanges of time and money using data from Indonesia. The extent of exchange and underlying motivations differ across families but substantial evidence supports the theory that transfers within families serve as insurance for family members. The results also suggest that between some parents and children money is exchanged for time. Additionally, some evidence is consistent with the idea that parents pay for their children's education partly as a loan that is later repaid. The authors compare their results to those that they obtained previously for Malaysia using similar data and methods. The findings regarding motivations for transfers are remarkably similar across the two countries. The family is a critical social institution in providing support to its members. The effects on this support of changes in family structures, such as longer life expectancies and greater diversity of
Caring for the elderly with dementia imposes a substantial burden on family members and likely ac... more Caring for the elderly with dementia imposes a substantial burden on family members and likely accounts for more than half of the total cost of dementia for those living in the community. However, most past estimates of this cost were derived from small, nonrepresentative samples. We sought to obtain nationally representative estimates of the time and associated cost of informal caregiving for the elderly with mild, moderate, and severe dementia. DESIGN: Multivariable regression models using data from the 1993 Asset and Health Dynamics Study, a nationally representative survey of people age 70 years or older (N = 7,443). SETTING: National population-based sample of the community-dwelling elderly. MAIN OUTCOME MEASURES: Incremental weekly hours of informal caregiving and incremental cost of caregiver time for those with mild dementia, moderate dementia, and severe dementia, as compared to elderly individuals with normal cognition. Dementia severity was defined using the Telephone Interview for Cognitive Status.
Alzheimer Disease & Associated Disorders, 2004
The number of older individuals with dementia will likely increase significantly in the next deca... more The number of older individuals with dementia will likely increase significantly in the next decades, but there is currently limited information regarding the out-of-pocket expenditures (OOPE) for medical care made by cognitively impaired individuals and their families. We used data from the 1993 and 1995 Asset and Health Dynamics Study, a nationally representative longitudinal survey of older Americans, to determine the OOPE for individuals with and without dementia. Dementia was identified in 1993 using a modified version of the Telephone Interview for Cognitive Status for self-respondents, and proxy assessment of memory and judgment for proxy respondents. In 1995, respondents reported OOPE over the prior 2 years for: 1) hospital and nursing home stays, 2) outpatient services, 3) home care, and 4) prescription medications. The adjusted mean annual OOPE was 1,350 US dollars for those without dementia, 2,150 US dollars for those with mild/moderate dementia, and 3,010 US dollars for those with severe dementia (p < 0.01). Expenditures for hospital/nursing home care (1,770 per year US dollars) and prescription medications (800 per year US dollars) were the largest OOPE components for those with severe dementia. We conclude that dementia is independently associated with significantly higher OOPE for medical care compared with those with normal cognitive function. Severe dementia is associated with a doubling of OOPE, mainly due to higher payments for long-term care. Given that the number of older Americans with dementia will likely increase significantly in the coming decades, changes in public funding aimed at reducing OOPE for both long-term care and prescription medications would have considerable impact on individuals with dementia and their families.
Since Frank Knight (1921) introduced the distinction, economists have recognized that risk is the... more Since Frank Knight (1921) introduced the distinction, economists have recognized that risk is the special case of uncertainty in which probabilities are known. Based on subjective survival probability questions in the Health and Retirement Study we use an econometric model to ...
Population aging and attendant pressures on public budgets have spurred considerable interest in ... more Population aging and attendant pressures on public budgets have spurred considerable interest in understanding factors that influence retirement timing. A range of sociodemographic and economic characteristics predict both earlier and later retirement. Less is known about the role of job characteristics on the work choices of older workers. Researchers are increasingly using the subjective ratings of job characteristics available in the Health and Retirement Study in conjunction with more objective measures of job characteristics from the Occupational Information Network (O*NET) database. Employing a theoretically-informed model of job demands-personal resources fit, we constructed mismatch measures between resources and job demands (both subjectively and objectively assessed) in physical, emotional, and cognitive domains. When we matched comparable measures across the two data sources in the domains of physical, emotional, and cognitive job demands, we found that both sources of information held predictive power in relation to retirement timing. Physical and emotional but not cognitive mismatch were associated with earlier retirement. We discuss theoretical and practical implications of these findings and directions for future research.
In this chapter we examine the financial situation of married couples with special attention to t... more In this chapter we examine the financial situation of married couples with special attention to the life-contingency structure of the various assets that comprise couples' wealth. The data corne from the Health and Retirement Study (HRS), a survey that provides unusually detailed information on family finances (see Chapter 1). We focus here on 3,362 married women who were age 51-61 in 1992. All statistical results are weighted by the women's person-level sampling weight in the HRS to ensure that the results are nationally representative. Mter describing the methods used to construct household wealth measures, we then compute how much would remain after the death of the husband or the wife, if that death occurred immediately. Next we convert wealth in each of the three possible surviving states into the sustainable annual consumption (annuity) that the couple or widow(er) could achieve. The results are then compared with earlier research on the adequacy of provision for prospective widows. We also compare survivors' sustainable consumption levels to poverty thresholds. This then indicates potential poverty rates in each survival state.
This chapter is the third in a sequence of papers by this team that investigates the implications... more This chapter is the third in a sequence of papers by this team that investigates the implications of the growth of 401(k) plans as the major source of pension wealth in the United States. Since I also served as discussant of the
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