A factor within your control can help you minimize cognitive decline later in life (and the poor financial decisions that result).
When’s the last time you thought of yourself as financially naive? Do you expect yourself to become less knowledgeable as you grow older? It happens. The FINRA Investor Education Foundation and Rush University Medical Center recently published studies that examine this phenomenon to find out what makes some people susceptible to making bad financial decisions as they age.
Dr. Gary Mottola, FINRA Foundation Research Director and one of the principal investigators, spoke to us about the studies and how the data might help us reduce the declines we experience in the future.
Financial risk, confidence, and Alzheimer’s
As we grow into adulthood, most of us gain a degree of confidence in our ability to make the right financial decisions that will boost our savings accounts. We learn life lessons along the way and adjust course accordingly. We don’t normally plan for the loss of accumulated knowledge or wisdom.
Unfortunately, it turns out that some of us will lose the ability to make good financial decisions after we reach the top of the hill and start down the other side.
Researchers now believe that confidence, financial risk tolerance, and Alzheimer’s disease are correlated.
One study that explores risky financial behavior by seniors showed that older Americans who are overconfident in their financial knowledge are more likely to engage in risky financial behavior (though work continues on that study). Two additional studies looked at the financial knowledge, cognitive health, and financial decision making of older Americans. They showed that people who lack confidence in their financial knowledge are at greater risk for developing Alzheimer’s disease.
Future cognitive decline doesn’t seem like something we need to worry about when we’re busy investing in our 50s. But for some of us, mental acuity slips away and leaves us vulnerable to poor financial choices. Unfortunately, when that happens, the abilities slip away faster than our confidence in them.
Who is most likely to experience cognitive decline?
Based on the results of this study, Dr. Mottola says that, on average, participants experienced a one percentage point decrease in cognitive ability each year starting at around age 65. That’s not universal, though. Given a lack of diversity in the studies, it’s impossible to know for sure how cognitive decline affects every person. Some people may experience no decline. Some people’s sharpness may improve. Others may even stay the same as they’ve always been. The problem is that it’s hard to know which group you’re headed for.
Several factors put women at a higher risk than men of experiencing cognitive decline and making a bad financial decision. For one thing, women live longer. The older you get, the more likely it is that you will experience some degree of decline.
Environmental factors could play a part, too. Other studies show that women are more likely to be targets (and victims) of financial elder abuse. Also, women are more likely to live alone in old age, without someone who might serve as a check and balance against risky decisions.
Spotting cognitive decline
Some people are aware of their decline, and researchers think they may have better outcomes later on than people who are oblivious to the changes. The FINRA Foundation and Rush University Medical Center are currently researching this possibility.
Identifying people experiencing early cognitive decline is very difficult to do. As loved ones age, those around them should look for warning signs. “Look for the simple changes in behavior, like forgetting their PIN number if they always remembered it in the past,” says Dr. Mottola. Any suspicions should be followed up with a professional evaluation.
Cognitive decline is not inevitable
Here’s the good news: There may be ways to prevent cognitive decline and the poor financial choices that result. As noted above, the Alzheimer’s study showed that people who are confident in their financial knowledge have a lower risk of developing Alzheimer’s. They experience a slower cognitive decline in general. That means building financial confidence may help protect you against future decline.
When you are ready to expand your knowledge (and confidence) in order to keep your brain healthy, focus on finances. In the studies, general confidence wasn’t tied to Alzheimer’s outcomes. Dr. Mottola says that the…
Read More: How Our Financial Decisions Change as We Age