Aging slows brain, but results in better financial decisions
Older people may have slower brains than younger individuals, but their superior experience more than makes up for the decline, as far as making financial decisions are concerned, researchers at the University of California, Riverside, found.
The study has been published in the journal Psychology and Aging and is titled “Complementary Cognitive Capabilities: Economic Decision Making, and Aging.”
Ye Li, Martine Baldassi, Eric J. Johnson and Elke U. Weber say theirs is the first study to measure decision-making throughout a human’s life through the lens of two types of intelligence: crystallized and fluid.
- Fluid intelligence – refers to our ability to learn and process data.
- Crystallized intelligence – refers to experience and accumulated knowledge.
The authors explained that previous studies had focused entirely on fluid intelligence and how it declines with age, without providing any compelling conclusions on whether our decision-making skills, particularly financial decisions, also deteriorate as we age.
The team set out to determine whether financially-related decision making gets worse, better or remains the same with age.
The researchers believe their study has broad implications. The average age of people worldwide is rising rapidly. Older adults increasingly have to make decisions regarding their retirement finances and health care.
As governments globally raise the minimum retirement age, a growing number of older adults will be making crucial business decisions in many sectors of the economy.
Li and team recruited 336 volunteers – 173 of them aged from 18 to 29 years, and 163 aged from 60 to 82.
The participants were asked a series of questions that “measured economic decision-making traits.” They also underwent a series of standard crystallized and fluid intelligence tests.
The following decision-making traits were measured:
- Temporal discounting – how much we discount future gains and losses.
- Loss aversion – how much does the valuation of losses more than make up for gains of the same magnitude?
- Financial literacy – how well somebody understands financial data and decisions.
- Debt literacy – how well does a person understand debt contracts and interest rates?
The researchers found that the older volunteers were either as good as or better than the younger ones in all four decision-making measures.
The senior participants demonstrated greater patience in temporal discounting as well as superior financial and debt literacy. The older volunteers were somewhat less loss averse than the younger ones, but not significantly so, the authors added.
“The findings confirm our hypothesis that experience and acquired knowledge from a lifetime of decision making help offset the declining ability to learn and process new information.”
Li added that older adults could be helped further if they were provided with aids to lessen the burden on their floundering fluid intelligence, such as an adviser or calculator, when making major financial decisions.
Better financial education for younger adults would help them gain experience with important financial decisions before they have to make them in the real world, the authors suggested.
The team members are now working on a follow-up project, focusing on 18 to 80 year-olds and how they select health care policies, pay off multiple credit card balances, and start drawing Social Security.