Sources of Lower Financial Decision-making Ability at Older Ages

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Abstract

After middle age, further aging is associated with lower levels of many cognitive abilities, some of which could influence import economic decisions. Our prior research (Choi et al., 2014) shows a substantial negative relationship between age and the consistency of choices with economic rationality (decisionmaking quality). This paper investigates the sources of that negative correlation using panel data on more than 4,000 members of a panel study in the Netherlands. The analysis finds no evidence that the correlation between age and rationality is, in fact, a just a cohort, not an age effect. Similarly, there is little evidence that the correlation is due to other forms of cognitive or health declines. Rather, the findings indicate that age has an independent and negative effect on economic rationality.

Key Findings

  • Our prior research (Choi et al., 2014) shows a substantial negative relationship between age and the consistency of choices with economic rationality (decisionmaking quality). This paper investigates the sources of that negative correlation using panel data on more than 4,000 members of a panel study in the Netherlands (LISS).
  • The LISS data reveal, after late middle age, an economically substantial and statistically significant negative correlation between age and measures of economic rationality in the experiment. Rationality scores are significantly lower for those age 63 and older.
  • There is no evidence that the negative relationship between age and economic rationality in the experiment is attributable to a cohort effect. Conditioning on the ability of participants to implement a particular choice using the experimental interface does not alter the negative correlation between rationality and age. Older people are more likely to have trouble with the interface in this way, but this ability is not strongly correlated with violations of transitivity in the experiment.
  • There is also no strong evidence that the correlation between age an economic rationality is the inevitable result of normal aging and its associated cognitive declines. Performance on the standard cognitive ability task is lower among older people in the sample, but conditioning on this measure of cognitive ability does not much alter the negative correlation between rationality and age. Thus, the lower levels of economic decisionmaking ability among older people appear to be a distinct phenomenon.
  • There is no evidence that health is an important driver of the negative relationship between age and economic rationality. Older people who self-report worse health, are at an unhealthy weight, or report more difficulties with activities of daily living do not have lower decision-making abilities in the experiment.
  • The results of the study thus support the idea that age leads to declines in economic decisionmaking ability that are distinct from other forms of cognitive decline and are not primarily a consequence of declining health more generally.

Citation

Kariv, Shachar and Dan Silverman. 2015. “Sources of Lower Financial Decisionmaking Ability at Older Ages.” Ann Arbor, MI. University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2015-335. http://mrdrc.isr.umich.edu/publications/papers/pdf/wp335.pdf]

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Paper ID

WP 2015-335

Publication Type

Working Paper

Publication Year

2015