Financial mistakes compounded by ageing process

A new research report claims financial mistakes are more likely and more consequential when ageing, complexity and large sums of money combine.

The research brief – financial decision making for and in old age – published by the ARC Centre of Excellence in Population Ageing Research (CEPAR) focuses on decisions related to personal retirement finances and explores how risks of poor decisions increase with age.

The report offers research insights from over 40 CEPAR researchers on how these risks can be mitigated and how cognitive health can be boosted for decision making in old age.

“Some of the most important financial decisions need to be made at a time when cognitive ability is at greater risk of decline,” says Rafal Chomik, report lead author and a CEPAR Senior Research Fellow at UNSW Business School.

The research featured in this report points to some solutions, which are also being investigated by policymakers, and offer a variety of lessons and insights about boosting financial knowledge and cognitive health for better deliberative thinking and adapting settings to biases so that impulsive, intuitive thinking gets us further.

“The report shows that financial literacy declines at older ages. Yet, confidence in one’s own financial capabilities continues to increase throughout retirement,” says Mr Chomik.

Kaarin Anstey, Scientia Professor of Psychology and a CEPAR Co-Deputy Director at UNSW Science, is one of the scientists whose research, on the causes, consequences, and prevention of cognitive ageing and impairment, is featured in the report.

“About 5%-20% of the population aged 60 and over is estimated to have mild cognitive impairment, characterised by problems with memory, language, thinking or judgment,” she says.

It is not severe enough to disrupt daily life but is likely to affect complex financial decisions. And as the population gets older, the share of people with some cognitive impairment is expected to increase.

“Policymakers need to develop better strategies to address health and financial risks in late-middle age, before the onset of old age, and our evidence-based research can help,” she says.

According to the report, the risk of cognitive impairment increases with age, but this risk could be mitigated making changes related to lifestyle, diet, exercise, and cognitive engagement.

The report also notes that risks of poor decisions due to cognitive impairment can be reduced by making contingency plans, for example by simplifying finances, locking in financial products earlier, and via advanced care planning; and financial decisions can also be dynamically delegated to family and/or advisers with appropriate safety mechanisms to prevent financial fraud and exploitation.

Hazel Bateman is a Professor of Pension Economics and CEPAR Co-Deputy Director at UNSW Business School. Her research focuses on consumer financial decision making especially as it relates to superannuation accumulation and decumulation with an emphasis on interventions to facilitate better financial decisions.

Professor Bateman investigates the role of choice and information architecture on lifecycle financial decisions including superannuation and housing.

“Choice architecture can help nudge impulsive decisions to preferred outcomes, and can thus affect us in decision making,” says Professor Bateman.

“Having defaults in financial products can simplify and guide decisions, but they need careful design.

“Better regulation of information provision, financial literacy initiatives that take account of how older people learn, and protections against poor financial advice to vulnerable consumers are needed,” she says.

Behavioural finance research featured in the report shows that decisions can be simplified and guided by:

  1. reducing the number of choices, for example by providing fewer but higher quality products;
  2. simplifying supporting information, for example by designing product disclosures that inform rather than confuse;
  3. adding nudging information, for example anchoring suggestions;
  4. timing of information provision and financial education;
  5. coaching the decision; and
  6. as an alternative to free choice, providing advantageous defaults or by outsourcing or sharing decisions with advisers or technology.

“Many decision mistakes are easier to identify than to address. So, the process of design-by-testing is advised, which would involve online experimental surveys, lab-based experiments, and field studies that examine how people behave under different approaches,” says Professor Bateman.

This approach is of relevance in the context of a new policy requiring superannuation providers to help retirees spend their savings with little guidance on how to do so. The policy is therefore an opportunity to design by testing,” she says.

Having a financial strategy in place that will achieve your financial objectives is key to longer term financial security and peace of mind.

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