As people age, they experience a toxic combination of declining financial literacy and increasing self-confidence. So says a new study conducted by researchers at the University of Missouri and Texas Tech University.
Cognitive declines are inevitable in advancing age, but the study demonstrates that those declines also apply to financial decision making. Coupled with stronger self-confidence, these declines often lead to financial mistakes and vulnerability to fraud, said the study.
The high-profile drama surrounding businessman and media magnate Sumner Redstone provides a vivid illustration of how cognitive declines experienced with advancing age can impact finances, said John Howe, professor and chairman of the Department of Finance at the University of Missouri’s Trulaske College of Business. Redstone is currently embroiled in high-profile legal battles that involve his daughter, a purported love interest, the fate of his $42 billion empire and questions about his mental competency at 92 years old.
“By the time you’re 92, most people ought to probably have a trusted advisor,” said Howe, who led the study along with Michael Finke and Sandra Huston from Texas Tech University.
The study, “Old Age and the Decline in Financial Literacy,” surveyed more than 3,850 individuals aged 60 and older to determine whether they were experiencing decreasing financial literacy, defined as the ability to understand and make good decisions about personal finances. Respondents were asked 16 multiple-choice questions about basic finances, borrowing, investing and insurance.
The study also asked respondents how confident they felt in their ability to make sound financial decisions. The study found slightly increased levels of self-confidence among the respondents. Even though they didn’t understand financial terms or policies well, they still believed they could make good decisions about their personal finances, the study found.
The study controlled for education level, income and wealth to determine the actual effect of age on financial literacy.
“Mixing a decline of financial literacy with an increase in self-confidence is a toxic combination,” said Howe. “This opens the door for more honest mistakes as well as fraud. It’s widely known that older adults are very common victims of financial fraud. It’s important that as we age, we find someone who has our best interests in mind when managing our finances.”
Howe recommends consumers meet with financial advisors who have a good reputation, but don’t necessarily choose the first advisor they meet with. Consumers should ask friends and family for recommendations, and then choose an advisor with a good record who is willing to take time to answer questions, including about how the advisor will be compensated.
It is crucial to put these advice mechanisms in place before the onset of cognitive decline, said Howe.