Sound credit scores and financial decisions despite cognitive aging

Abstract

Age-related deterioration in cognitive ability may compromise the ability of older adults to make major financial decisions. We explore whether knowledge and expertise accumulated from past decisions can offset cognitive decline to maintain decision quality over the life span. Using a unique dataset that combines measures of cognitive ability (fluid intelligence) and of general and domain-specific knowledge (crystallized intelligence), credit report data, and other measures of decision quality, we show that domain-specific knowledge and expertise provide an alternative route for sound financial decisions. That is, cognitive aging does not spell doom for financial decision-making in domains where the decision maker has developed expertise. These results have important implications for public policy and for the design of effective interventions and decision aids.aging | decision-making | cognitive ability | consumer finance | credit score O ver the next decades, the average age of the worlds' population will rise rapidly. One in five Americans is expected to be over 65 y old by 2030, and the number of people 65 and older worldwide will double by 2035.This "gray tsunami" will propel two trends. The first, described by economics' life cycle model (1), is that more people who have accumulated wealth for retirement will face difficult decumulation decisions: how quickly to consume their wealth and how to ensure it will last for their remaining years of life. Fig. 1 shows wealth accumulation in the United States by age, with bars representing net worth and wealth held in equities (i.e., stocks and mutual funds)-financial holdings requiring more active monitoring and choices. In 2011, Americans over 65 collectively managed 43% of US household wealth and 47% of privately held equities. Furthermore, policy changes [e.g., to defined contribution retirement plans such as 401(k)s] have transferred many complex financial and healthcare decisions to individuals.The second trend results from one of the most sizable and robust findings in all of psychology: The brain slows with age.

Stability and change in risk-taking propensity across the adult life span.

“…The SOEP, for instance, relies almost exclusively on self-report assessments of behavior rather than on observational or registry data. Recent studies have shown the feasibility of complementing self-report assessments with objective real-world assessments, such as health markers (Moffitt et al, 2011) or financial reports (Li et al, 2015). Showing predictive value of current risk-taking propensity measures for real-world behavior would remove potential doubts about the validity of the single-item measures in the present investigation.…”

Choosing to be happy? Age differences in “maximizing” decision strategies and experienced emotional well-being.

“…Third, it is also possible that older adults have learned from experience with previous life decisions that striving for the very best poses threats to their emotional well-being that they are motivated to avoid. Indeed, it has been argued that older adults may have learned insights relevant to decision making from life experience (Bruine de Bruin, Strough, & Parker, 2014; Li, Baldassi, Johnson, & Weber, 2013; Li, Goa, Enkavi, Zaval, Weber, & Johnson, 2015; Yates & Patalano, 1999). …”

Decision making in the ageing brain: changes in affective and motivational circuits

“…Recently, theorists have built upon classic observations of adult age differences in fluid and crystallized cognitive abilities 130 to explain age-related differences in decision performance 97,131,132 . Although fluid cognitive ability decreases linearly across adulthood, crystallized ability increases non-linearly and begins to level off in late middle age 131 (see figure, panel a).…”