Meet the Researcher: Christopher D. Carroll & Patrick Kofod Mogensen

Posted on March 22, 2019

Selected for the TFI long-term research grant: Christopher D. Carroll and Patrick Kofod Mogensen! The goal of their research project is to develop an open source tool to model complex choices involving spending, investing, home buying and retirement. Who are the researchers, what is their project about and what motivated them to apply?

The online advice people currently get on important financial decisions is often based on rules of thumb and intuition, rather than serious treatment of the complexities involved. Worse, while such tools are available for individual choices (size of retirement savings, or portfolio composition), the truly optimal choices in these financial considerations are deeply connected. For example, the optimal amount to save for retirement in financial forms relates to the pace of paying down your mortgage and buying a house changes the optimal retirement plan. These connections are practically always ignored.

In this project, we will develop a model of optimal choices for spending, investing, home buying and retirement, taking into account the complex interactions between those and related choices. This model will be based on existing results and recent computational models. Unique to this project is the development of open source software on which tools could be built that would be useful for financial advisors and researchers interested in computational economics. Ultimately, this would help people in planning their retirement, their investments, and housing decisions. This project is part of the broader Econ-ARK toolkit that aims to better understand how economic and social outcomes result from the actions of heterogeneous individuals.

“Current financial advise often ignores the deep connection between financial decisions across domains such as housing, saving for retirement and investing”

What was your motivation to apply for the Think Forward Initiative research grant?

We applied for a TFI grant because the strong focus on improving financial decisions and understanding financial behavior aligned perfectly with the goals we have for where we want Econ-ARK to go next. The methodological foundation of the Econ-ARK toolkit is strong, but it does not yet incorporate some of the techniques that are being developed at the research frontier. These techniques are necessary in order to deal with particularly complex choices (such as home ownership and mortgage borrowing, and decisions related to retirement) that are vital both to consumers' personal lives and to macroeconomic fluctuations. Because these techniques are new and still at the "proof-of-concept" stage, until now very few, if any, financial institutions or FinTech companies have built practical tools for financial advice to consumers (such as how retirement saving goals should be related to mortgage choice, or vice versa).

How do you expect that your research will contribute to people’s financial well-being?

The Econ-ARK open source software can be used to gain insights and build intuition about behavior such as spending and saving choices in various economic settings, and in capturing the important role of differences in consumers' circumstances over the business cycle or the life cycle.

With TFI, we will build a robust, open source, publicly available set of tools that can serve as the core infrastructure around which FinTech firms or financial institutions could build more approachable and user-friendly financial advisory tools, with the confidence that the foundation of the advice was firmly grounded in the latest rigorous analysis of the complex interaction between big life decisions like mortgage choice, retirement saving, and more.

Christopher D. Carroll is professor of Economics at the Johns Hopkins University, and co-chair of the US National Bureau of Economic Research. He obtained his PhD at the Massachusetts Institute of Technology and worked, among others, for the Federal Reserve Board in Washington DC. His research has primarily focused on consumption and savings behavior. As head of the Econ-ARK project he aims to reconcile empirical evidence from both microeconomic and macroeconomic sources with theoretical models to better understand and predict optimal financial choices.

Patrick Kofod Mogensen is a PhD student of Economics at the University of Denmark and will be on leave of absence to work on the Econ-ARK project. He is particularly interested in mathematical modelling and will be responsible for the economic research and software development in this project.