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Time Discounting and Economic Decision-making among the Elderly

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Abstract

This research project evaluates the extent of heterogeneity in time discounting among elderly Americans, as well as its role in explaining older peoples’ key behaviors. We first show how older Americans evaluate simple (hypothetical) intertemporal choices in which payments now are compared with payments in the future. This adds to the literature on time horizon experiments by focusing on a nationally representative sample of persons age 70+. Using the indicators derived from this experiment, we show how differences in discounting patterns are associated with characteristics of particular importance in elderly populations, such as serious health and mental conditions. We then relate our discounting measure to key outcome variables including wealth, the timing of retirement, investments in health, and decisions about end-of-life care.

Key Findings

  • We find that implied Internal Rates of Return (IRR) used by our older respondents to discount future payments is 0.54.
  • IRRs rise with age, such that a 15-year increase in age from 70 to 85 would be associated with about a one standard deviation higher IRR.
  • Whites and the better-educated have lower IRRs, while people with serious health conditions implying reduced life expectancy have 11-30 percent higher IRRs. Also IRRs are 35 percent higher than average for individuals diagnosed with a cognitive condition (dementia or Alzheimer’s).
  • Net wealth is significantly lower for the least patient individuals. Additionally, the impatient are much less likely to engage in healthy behaviors and make little provision for end-of-life challenges.

Citation

Huffman, David, Raimond Maurer, and Olivia S. Mitchell. 2016. “Time Discounting and Economic Decision-making among the Elderly.” Ann Arbor MI: University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2016-347. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp347.pdf

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Project

Paper ID

WP 2016-347

Publication Type

Working Paper

Publication Year

2016