Does financial decision making decline with age?
We often read or hear stories about seniors being conned out of their life savings, but are older people really more susceptible to fraud than younger adults?
After peaking in middle age, the ability to make effective financial decisions begins to decline, suggests a recent study. Where’s the sweet spot? About 53 years old — which seems odd to me since people have garnered a fair amount of financial experience by then and generally still have most of their faculties.
The research team led by economist Sumit Agarwal looked at several financial decisions facing people ranging in age from 25 to 75, including transferring an account balance to a new credit card and borrowing through a line of credit. In every case, those in the oldest group made decisions that resulted in them paying more than others.
With home equity lines of credit, for example, the plus 53 crowd tended to incorrectly estimate the value of their homes and, as a result, took out home equity loans with higher interest rates than required. But they didn’t exactly trade the farm for a tricycle.
Agarwal’s proposed solution, nonetheless? Set up a government licensing system to ensure older adults have a sound level of financial understanding before they’re permitted to invest.
We need a license to drive, for example. So why not a test to ensure we’re still equipped to deal with our finances, he suggests. In the same way that several provinces reassess older drivers, seniors could be required to pass the test again after a certain age.
Except that it’s individual differences in processing speed and memory, not age, that are usually predictors of poor decision making, counters Duke University prof Scott Huettel.
As a result, rather than licensing, a better solution might be to allow older people more time for decisions, or presenting data in certain ways to assist them in making those decisions, his research suggests.
My mother will be very pleased.
What do you think? Is more licensing going to help older people cope with finances? And what happens to those who fail the test?By Gordon Powers, MSN Money