New research has found that a lifetime of acquired financial expertise and knowledge offsets older people’s declining ability to efficiently process information when making financial decisions.
Using credit scores and cognitive ability tests, researchers at the University of California, Riverside, and Columbia University found evidence that “crystallized intelligence,” gained through experience and accumulated knowledge, is more important than “fluid intelligence,” the ability to think logically and process new information.
The researchers note that past studies have shown that fluid intelligence decreases with old age, a phenomenon known as “cognitive decline.”
The researchers note that their study found that one standard deviation increase in fluid intelligence, equal to about 15 IQ points, corresponded to 22 more points on a credit score.
They also found that one standard deviation increase in financial-domain crystallized intelligence, which equates to answering 3.5 more questions accurately on a 13-question financial literacy test, corresponded to 47 more points on a credit score.
“The research shows that despite cognitive graying, older people’s financial decision-making may be more ‘golden’ than a slowing brain might otherwise suggest,” said Ye Li, Ph.D., an assistant professor of management and marketing at the UC Riverside School of Business Administration, who is the lead author of the paper.
He notes the study has important implications as the population ages. One in five Americans is expected to be over 65 years old by 2030, and the number of people 65 and older worldwide will double by 2035, he reported.
This means more people with accumulated wealth will face decisions about how quickly to consume their wealth and how to ensure it will last for their remaining years of life. Furthermore, policy changes, such as Obamacare and the shift from pensions to 401(k) plans, have transferred many complex financial and health care decisions to individuals.
The new research examines data from 478 residents in the United States who completed a number of cognitive, decision-making and demographic tests, including assessments of financial literacy and health literacy. This data was then merged with participants’ credit scores, researchers said.
The researchers argued that people who present financial information, such as policymakers or financial services firms, need to take into account the fact that fluid intelligence declines in older adults.
This could be done, they said, by limiting the number of provided options or by allowing decision-makers to sort options by attributes. For example, instead of providing a list of 50 health insurance plans, the list could be filtered by monthly cost or maximum out-of-pocket costs. Even better, decision aids could highlight the best plans based on past health conditions and insurance usage, researchers conclude.
The study, supported by the National Institute on Aging and National Endowment for Financial Education, was published in the journal Proceedings of the National Academy of Sciences.