Aging and Financial Decision Making: What Changes and What Stays the Same?
By Hal Hershfield
In my ﬁrst faculty job at NYU, I taught an Intro Marketing class to a few sections of undergrads. Even though I was about 12 years older than the students, I still felt quite young – I was only 32, after all! Plus, it seemed like my students and I were more or less on the same page … that is, right up until I had one of my ﬁrst oﬃce hours appointments. As I was writing some emails and listening to a Spotify playlist, a student walked in and suddenly exclaimed, “Wow, this is not the same sort of music that my parents listen to!”
“Obviously, it’s not the same music,” I thought, “her parents are probably about 20 years older than me; there’s no way she can think I’m that old.” But of course, that’s exactly what she thought.
Shortly thereafter marked the first time I looked in the mirror and asked myself, “Am I … getting old?”
It was also the ﬁrst time that I started thinking earnestly, not just about my age but about how my age might affect my choices, especially my ﬁnancial ones (I’m a business school professor, after all).
Mind you, I wasn’t a stranger to these topics. My graduate school mentor, Laura Carstensen, is a pioneer in the study of aging and decision-making. So, I spent a decent amount of time studying the speciﬁc ways that age impacts choices. I just hadn’t considered deeply that one day I, too, would be“older,” and that age would one day affect me.
I know, I know. Thirty-two isn’t old! These days, I’d kill to be able to sleep soundly through the night, work out without feeling sore, and take a redeye without feeling drained for days. But according to well-validated psychological research, 32 isn’t exactly young either.
Here’s what the data suggests: Starting in our 20s, our “ﬂuid intelligence” — or ability to process and integrate information — starts to decline, at least on some tasks. At the same time, our “crystallized intelligence” — or ability to apply previously acquired knowledge — seems to improve.
As psychologist Timothy Salthouse put it, “Normal cognitive aging is characterized by nearly linear declines from early adulthood in speed and accelerating declines in memory and reasoning. However, vocabulary knowledge increased until the decade of the ’60s.”1
I’m oversimplifying, but the gist is there: Fluid intelligence goes down while crystallized intelligence goes up. So, how might these different age-related changes inﬂuence our ﬁnancial decisions? Let me spotlight two possible paths.
Some Things Decline
With declining ﬂuid intelligence comes a declining ability to grapple with complex ﬁnancial decision-making tasks.² Making choices in contexts with many possible options, where a plethora of information is ﬂying by all at once or in novel settings, may exacerbate some of the age-related declines.
Unfortunately, these are the ingredients of many ﬁnancial scams, to which older adults are particularly susceptible. There’s a silver lining, though: Cognitively healthy older adults seem to compensate by setting up decision-making environments that limit cognitive demands (e.g., choosing from among a smaller set of options or eliminating bad options ﬁrst to winnow a choice set). Practically speaking, as we and our loved ones age, we might want to be warier of complex, risky decisions.
Some Things Improve
There are some positives associated with the aging trajectory. Because crystallized intelligence seems to improve as we get older, in contexts where experience matters, age may confer an advantage. In fact, older people seem less susceptible to sunk cost biases (that is, they are better at ignoring sunk costs when deciding how to proceed with an investment) and are less susceptible to making impulsive purchases.3
Age Isn’t Just a Number
Age is relative. In my ﬁrst academic job, compared to my students, I was practically eligible for Social Security beneﬁts; compared to my senior colleagues, however, I was a young colleague.
But relativity also matters when it comes to how age impacts our ﬁnancial decisions. The ﬁndings that I’ve brieﬂy discussed reﬂect averages across thousands of people. Your declines may come later, and your improvements earlier than mine. Moreover, it’s not the case that improvements last forever.
I noted earlier, crystallized intelligence improves up until the 60s. That means that some things that are beneﬁted by age — say, the ability to ignore sunk costs — also start to decline as we move past the 60s into our 70s, 80s, and beyond. But being aware of what abilities show relative improvements and which ones show relative declines can help us orient our attention to where we might need outside help, not only for ourselves but those around us.
1Timothy A. Salthouse, “Trajectories of normal cognitive aging,” Psychology and Aging 34, no. 1 (February 2019): 17-24.
2For a comprehensive review of how ﬁnancial decisions change (or not) with age, see JoNell Strough, Jenna Wilson and Wändi Bruine de Bruin, “Aging and Financial Decision Making,” in Psychological Perspectives on Financial Decision Making, eds. Tomasz Zaleskiewicz and Jakub Tracyk (Switzerland: Springer Nature, 2020), 167-186.
3Dorien F. Bangma, Anselm B.M. Fuermaier, and Lara Tucher, et al., “The effects of normal aging on multiple aspects of ﬁnancial decision-making,” PloS One 12, no. 8 (August 2017): e0182620.