Cognitive functioning, financial literacy, and judgment in older age

Abstract

We investigate the relationships between financial literacy, financial judgment, and cognitive ability at older ages. We find people who actively manage their own retirement savings portfolios display greater levels of financial literacy and judgment than those who do not. We identify the different cognitive processes underlying financial judgment and decision-making tasks versus those underlying learned concepts such as basic financial literacy. Although these decline at different rates the latter may potentially compensate for, and mask declines, in the former. We find an overall low propensity to seek financial advice which has no significant relationship with cognitive functioning. Our findings underscore the importance of monitoring cognitive ability in older ages.

Financial Knowledge and Private Health Insurance: Does Age Matter?

“…In the same vein, Harnett [21] asserts that numeracy alone is not sufficient as FK. Therefore, following other previous studies [17][18][19][20], we consider that when studying the relationship between possessing FK and holding PHI, a distinction must also be made between at least two levels of FK-basic and advanced.…”

“…The second and third variables were created by splitting FK into two levels, namely basic financial knowledge (Basic FK) and advanced financial knowledge (Advanced FK). Among the authors that have considered these types of FK are van Rooij et al, (2012) [17], Bannier and Schwarz [18], Engels et al [19] and Gerrans et al [20]. To create these indicators, items that corresponded to basic concepts were distinguished from those that represented more sophisticated financial concepts.…”

“…To contrast the moderating effect of the age, we considered two age groups: younger adults, under 50 years (Young-adult) and middle-aged and older, considered to be 50 years or more (Middle-older). Among the studies that have considered 50 years as the line between older and younger groups are Christelis et al [50], Fong et al [51], Bialowolski et al [52] and Gerrans et al [20]. Additionally, this allowed comparisons with the results of Paccagnella et al [8], the only other study that has analysed the relationship between FK (albeit basic numeracy) and PHI in European countries, based on only approximately 50 people.…”

“…As we have indicated, FK is the main component of FL, and many studies exclusively associate it with financial literacy (e.g., [11][12][13][14][15][16]). In addition, some authors (e.g., [17][18][19][20]) distinguish two levels of FK, namely basic and advanced, depending on the complexity of the financial concepts. For example, numeracy is basic knowledge, while understanding the "risk/return" relationship may be considered advanced financial knowledge.…”