Here’s a question that just about everyone approaching (and passing) middle age will feel ambivalent about: how does getting older affect our ability to make rational decisions? On the one hand, it’s common knowledge that our cognitive abilities begin to decline in our fifties. On the other, as I’ve written before, the accumulation of experience and, yes, wisdom, may offset the effects of this decline. The research on this topic is a mixed bag:
- In a clinical study involving lotteries, some where subjects could make money and others where they could lose money, seniors managed risk inconsistently. They took too little risk in lotteries where gains are possible and too much risk in lotteries where losses are possible. This was unexpected because it means that seniors are not always more risk averse than younger people: it depends on whether they’re in a situation where they’re trying to avoid losses or win big.
- Given that result, it’s not surprising that another study found that, during the 2008 recession, the elderly were more likely to sell out their equity investments near historic lows, leading to underperformance in their investment portfolios.
- In Old Age and the Decline in Financial Literacy, researchers found that financial literacy declines steadily after age 50 while self-confidence remains constant. Some consequences include higher mortgage rates, failure to refinance and less effective use of credit card reward cards versus younger people. A Brookings Institute study found that fees and interests costs were at their minimums for 53 year olds, after which they increased.
- In one study about choosing insurance plans, choice overload sets in faster for older people, whose decision quality declines as the number of choices increases more dramatically than for younger people. Older people tended to use poor heuristics to make their choices, for example, by simply counting the number of positive attributes of each plan. (They would do better to consider the likelihoods of various scenarios.)
- The research is not all depressing. There is some evidence for wisdom among older folks insofar as thinking about the future. Researchers at Texas A&M found that older people were better able to think through the consequences of current choices on future decisions.
“We found that older adults are better at evaluating the immediate and delayed benefits of each option they choose from. They are better at creating strategies in response to the environment”
The takeaway is that we need to leverage the benefits and offset the drawbacks of aging on decision-making. As we age, we should rely more on younger relatives and advisors as well as decision tools and automation to manage risk and make decisions, especially in the financial domain. With a little help from our friends, we can rely with increasing confidence on our ability to make our most consequential personal and professional decisions with wisdom, experience and care.
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