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Rich and Co.

Oh oh! -“…there is something distinct about financial decision making ability that declines in older ages”

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…economists have found a negative relationship between age and several measures of economic decision-making ability…in particular, a substantial negative relationship between age and the consistency of choices with economic rationality…people over age 55 have significantly lower levels of rationality than younger people.

Specifically, older people’s choices are much more likely to violate transitivity; in a simple economic environment they more often reveal a strict preference for good x over good y and also a preference for good y over good x. Classical economic theory implies that choices that violate transitivity in this way are inconsistent with any stable objective.

Because choices that violate this standard of rationality are inconsistent with any fixed goal, our approach treats them as lower quality than rational choices.

This view is supported by more than normative theories of choice. We interpret rationality in the experiment as a measure of decision-making ability in part because…a large, statistically significant correlation between rationality and wealth that is robust to conditioning on correlates of preferences, constraints, information, and beliefs.

  • after late middle age, an economically substantial and statistically significant negative correlation between age and measures of economic rationality…After conditioning on several socio-demographic characteristics, 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.
  • 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.

… the lower levels of economic decision making ability among older people appears to be a distinct phenomenon from general cognitive decline….There is no evidence that health is an important driver of the negative relationship between age and economic rationality.

….age leads to declines in economic decision making ability that are distinct from other forms of cognitive decline and are not primarily a consequence of declining health more generally.

Social science has documented that older people have lower levels of several cognitive skills. Some of these skills are likely important for making sound spending, saving, insurance, or health choices. Indeed, our prior work showed that older people exhibit lower levels of economic rationality in a simple, incentivized choice experiment…older people are less able (or willing) to make choices consistent with any stable objective.

In this paper, we used a new dataset to investigate the sources of the correlation between age and economic rationality.  In the new data, we replicate the qualitative relationship observed in the previous work.  Older people have lower levels of economic rationality and these differences are both statistically and economically significant.  The findings suggest that the decline in economic rationality with age is a true age effect, not a cohort effect…findings indicate that the relatively lower levels of decision making quality among older people should be expected to persist.  Similarly, we find no evidence that the decline in economic rationality…is explained by more general forms of cognitive decline.

Thus, the findings indicate that the lower decision making quality among older people is not a simple consequence of declines in general forms of cognitive ability.  Finally, we find no evidence that the lower average levels of cognitive ability in older people is concentrated among those who have experienced important declines in physical health.

…results indicate that economic decision making quality declines with normal aging and this is distinct phenomenon form other forms of cognitive decline with age. The evidence thus suggests that there is something distinct about financial decision making ability that declines in older ages….diminished capacities to understand and make effective economic tradeoffs are influencing choices in older population.

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Written by Rich and Co.

March 3, 2016 at 6:14 pm

Posted in Uncategorized

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