A recently published study that involved 4000 people concluded that while aging generally has a negative effect on making decisions, the decline in the ability to make optimal economic decisions is a “distinct phenomenon” from other forms of age related cognitive decline. This might mean that our ability to make economic decisions declines sooner than our ability to make other types of decisions.
When it comes to making decisions the working memory, also known as fluid intelligence, is called upon because it holds the different bits of new information you need to process. Both the amount of new information you can hold and the speed at which you can process it begin to decline about when you enter adulthood. The reason we can still function at age 40 is, as we age, we also pick up knowledge, also known as crystallized intelligence, which means we don’t need as much new information. The end result is the quality of our decisions improves until, usually, sometime in our sixties or seventies – depending on the individual – when the quality declines.
A new study says that our ability to make financial decisions declines differently than our ability to make other decisions, and perhaps at a quicker pace. This news follows other studies that say seniors generally made good decisions regarding retirement and that their decisions were often better than juniors. Although the results of the new and the older studies seem to be contradictory, that is not necessarily so, because what it may mean is financial decision-making follows a different path of decline and not that the person is unable to make good decisions.
Even though cognitive functions decline this doesn’t mean a 75 year old automatically makes worse decisions than a 25 year old, but it does mean the 75 year old may not make the optimal decisions they might have made at age 55. However, most decisions do not need to be optimal; they simply need to be good enough. This study is in no way saying that aging causes people to make bad decisions.
What this new study does is question the belief held up to now that the mental or cognitive decline was the same across the decision spectrum. In other words, we thought that whether the older person was trying to decide which hotel to stay at, which car to lease or which annuity to buy, that their decision making resources would operate at the same level for these different decisions, but this new study suggests that may not be true.
If this study is correct, what do we do? A knee-jerk reaction might be for regulations to limit the economic choices of the aged or to require government guardians to make the choices for seniors. A less intrusive policy is to encourage the use of financial solutions that do not require ongoing decision-making – such as using life income annuities rather than managing withdrawals from a portfolio. However, until we know whether this specific decline is happening and why, there can’t be any solutions—because we haven’t identified the nature of the decline or tested different remedies to combat or minimize its effects.
While we’re waiting for the results of additional research, we can still practice the key elements that allow all of us to make better decisions:
• Allow sufficient time for the new information to be processed;
• Minimize distractions;
• Probe for understanding by asking the decider to tell you what you just told them (and not simply asking “do you understand”);
• And don’t make decisions when you are tired.
Aging does not mean bad decisions. The vast majority of people reach the end with the ability to still make good decisions, but it does require a little more effort as you go along.
Footnote:
Kariv, S. & D. Silverman. 2015. “Sources of Lower Financial Decision-making Ability at Older Ages.” University of Michigan Retirement Research Center Working Paper, WP 2015-335. http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp335.pdf
