How our financial decisions change with age


A factor in your control can help you minimize cognitive decline later in life (and the poor financial decisions that result from it).

When was the last time you considered yourself financially naive? Do you expect to become less proficient as you get older? It happens. the FINRA Foundation for Investor Education and Rush University Medical Center recently published studies that examine this phenomenon to find out what makes some people susceptible to poor financial decisions as they age.

Dr Gary Mottola, Research Director of the FINRA Foundation and one of the lead researchers, told us about the studies and how the data could help us reduce the declines we will experience in the future.

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Financial risk, trust and Alzheimer’s

As we reach adulthood, most of us gain some confidence in our ability to make the right financial decisions that will increase our savings accounts. We learn life lessons along the way and adjust our course accordingly. Normally, we do not foresee the loss of the accumulated knowledge or wisdom.

Unfortunately, it turns out that some of us will losing the ability to make good financial decisions after you get to the top of the hill and start going down the other side.

Researchers now believe that confidence, financial risk tolerance, and Alzheimer’s disease are correlated.

A study that explores risky financial behavior of the elderly showed that older Americans who are overconfident in their financial literacy are more likely to engage in risky financial behaviors (although work continues on this study). Two other studies looked at financial literacy, cognitive health, and financial decision making of older Americans. They have shown that people who are not confident in their financial knowledge are at greater risk of developing Alzheimer’s disease.

Future cognitive decline doesn’t seem like something we need to worry about when we’re busy invest in your fifties. But for some of us, mental acuity wears off and leaves us vulnerable to poor financial choices. Unfortunately, when this happens, abilities disappear faster than our self-confidence.

Who is most likely to experience cognitive decline?

Based on the results of this study, Dr Mottola says that on average, participants experienced a one-percentage point decrease in their cognitive abilities each year from around age 65. However, this is not universal. Given the lack of diversity in studies, it’s impossible to know for sure how cognitive decline affects each person. Some people may not experience any decline. The sharpness of some people may improve. Others may even stay the same as they always have been. The problem is, it’s hard to know which group you’re headed to.

Several factors put women at a higher risk than men of experiencing cognitive decline and making the wrong financial decision. On the one hand, women live longer. The older you get, the more likely you are to experience some decline.

Environmental factors could also play a role. Other studies show that women are more likely to be the targets (and victims) of financial abuse of seniors. In addition, women are more likely to live alone in old age, without someone who could act as a counterweight to risky decisions.

Spot cognitive decline

Some people are aware of their decline, and researchers believe they may perform better later than people who are unaware of the changes. The FINRA Foundation and Rush University Medical Center are currently investigating this possibility.

Identifying people who experience early cognitive decline is very difficult to do. As loved ones age, those around them should look for warning signs. “Look for simple behavior changes, like forgetting their PIN code if they still remembered it in the past,” says Dr Mottola. Any suspicion should be followed by a professional assessment.

Cognitive decline is not inevitable

Here’s the good news: There may be ways to prevent cognitive decline and the poor financial choices that result from it. As noted above, the Alzheimer’s disease study showed that people who are confident in their financial knowledge have a lower risk of developing Alzheimer’s disease. They generally experience slower cognitive decline. This means that building financial confidence can help protect you against future decline.

When you’re ready to expand your knowledge (and confidence) to keep your brain healthy, focus on finances. In studies, general confidence was not related to Alzheimer’s disease outcomes. Dr Mottola says the correlation between confidence and cognitive decline is specific to financial trust.

Minimize cognitive decline

The happy balance we want to find is between low confidence and overconfidence in our financial knowledge. Acquiring knowledge leads to increased confidence. But it’s worth noting that the more knowledge we have, the more likely it is that our confidence level will be the right size. This is because increased knowledge is correlated with intellectual humility.

“The suspicion is that confident people engage in the world differently,” says Dr Mottola. “Maybe they ask more questions. Maybe they have more interaction, and this can be helpful in preventing cognitive decline.”

Most importantly, Dr Mottola says financial literacy and confidence are malleable. The trajectory of cognitive decline could be altered by addressing the problem with an educational intervention.

In other words, education is the key to increasing financial confidence. Financial education therefore provides both knowledge and prevention. Focusing on investment and retirement advice, aging adults can learn to stay alert and make sound financial decisions, while also training their brains and fending off the cognitive decline that would inevitably affect other areas of their lives.

FINRA’s mission is to protect investors and is active in the senior community. But FINRA is just a player. Collaborations will be necessary to reach a wider audience.

Many aging adults do not have access to education and financial resources. Those of us who are aging or caring for aging people should proactively seek out opportunities to gain better financial education.

FINRA offers a range of personal finances and smart investment resources to help individuals acquire essential financial literacy and investment skills. Investors who have questions or concerns about their brokerage accounts and investments can contact the FINRA Securities Helpline for Seniors toll-free at 844-57-HELPS (844-574-3577). FINRA staff can assist investors with the risk of fraud or inappropriate or excessive trading, answer questions about account statements or basic investment concepts, and assist beneficiaries who have difficulty locating or to transfer the assets of their deceased parents.

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