Growing older doesn't affect financial decision-making skills

Scientists have claimed that cognitive aging has no negative affect financial decision-making skills of people.

According to new research from Columbia Business School, though growing older slows the mind and the ability to make decisions, when it comes to making financial decisions, many baby boomers would be pleased to know that experience, knowledge, and expertise can compensate for the challenges that age-related deterioration present in finance.

The study found evidence that "crystallized intelligence," which is gained through experience and accumulated knowledge, can be more important that "fluid intelligence," the ability to think logically and process new information.

Eric Johnson, co-author of the study said that their research showed that cognitive decline was real, but does not spell doom for making financial choices. An alternative route to making sound financial decisions comes from experience-and that improves with age.

In a four-part, web-based study, researchers assessed the cognitive ability and economic preferences of 478 US residents between the ages of 18 and 86. The web-based study included a battery of cognitive, decision-making, and demographic measures.

Researchers then leveraged a unique data set combining measures of cognitive ability and knowledge with credit scores, a measure of credit-worthiness that reflects sustained ability for sound financial decision-making. This dataset allowed researchers to explore whether knowledge and expertise accumulated from past decisions could offset age-related declines in cognitive ability.

Johnson said that it could be misleading to only assess the effect of age on decision quality. Policymakers and future researchers should also examine the distinct roles of decreasing cognitive abilities and increasing domain-specific knowledge and expertise when developing tools for the aging population.

The study is published in the Proceedings of the National Academy of Sciences (PNAS).