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Fed/GFLEC Financial Literacy Seminar Series

September 17, 2020

3:30 PM - 4:30 PM ET

Seminar I: Are People Aware of Their Cognitive Decline? Misperception and Financial Decision Making

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Franco Peracchi

Professor of Econometrics at the University of Rome Tor Vergata

Professor of the Practice at Georgetown University

LOCATION

Online

Bio: Franco Peracchi

Franco Peracchi is a Professor of Econometrics at the University of Rome Tor Vergata and a Professor of the Practice at Georgetown University. He is also a Fellow of the Einaudi Institute for Economics and Finance (EIEF) in Rome, Italy. He earned an MSc in Econometrics and Mathematical Economics from the LSE, and a PhD in Economics from Princeton University. His research interests include econometric theory, labor and health economics, and the economics of social security and pensions. His currently research areas include the long-term effects of growing up in wartime, cognitive decline among the elderly, distribution regression, and approaches to model uncertainty.

Abstract

We investigate whether people correctly perceive their own cognitive decline, and the potential financial consequences of misperception. First, we document that older people tend to underestimate their own cognitive decline. Then, we show that individuals who experience a severe cognitive decline, but are unaware of it, are more likely to experience wealth losses. These losses largely reflect decreases in financial wealth and are mainly experienced by wealthier individuals, unaware of their declining memory, who were previously active on the stock market. Our findings support the view that financial losses among unaware respondents reflect bad financial decisions, not rational disinvestment strategies.