Old Age and the Decline in Financial Literacy

Forthcoming in Management Science

40 Pages Posted: 24 Oct 2011 Last revised: 30 Oct 2015

Michael S. Finke

The American College

John S. Howe

University of Missouri at Columbia - Department of Finance

Sandra J. Huston

Texas Tech University

Date Written: August 24, 2011

Abstract

Households over age 60 own half of the discretionary investment assets in the United States and are increasingly responsible for generating income from these investments to fund retirement. Studies in cognitive aging show that older respondents experience a decline in cognitive processes closely related to financial decision making. We investigate whether knowledge of basic concepts essential to effective financial choice declines after age 60. Financial literacy scores decline by about 2% each year after age 60, and the rate of decline does not increase with advanced age. Results from regressions censored by respondent groups and financial literacy topic areas suggest that the decline is not related to cohort effects or differences in gender or educational attainment. Confidence in financial decision making abilities does not decline with age. Increasing confidence and reduced abilities can explain poor credit and investment choices by older respondents.

Keywords: personal finance, financial literacy, cogntive ability, household finance, cognitive aging

JEL Classification: D14

Suggested Citation

Finke, Michael S. and Howe, John S. and Huston, Sandra J., Old Age and the Decline in Financial Literacy (August 24, 2011). Forthcoming in Management Science. Available at SSRN: https://ssrn.com/abstract=1948627 or http://dx.doi.org/10.2139/ssrn.1948627

Michael S. Finke (Contact Author)

The American College ( email )

Bryn Mawr, PA 19010
United States

John S. Howe

University of Missouri at Columbia - Department of Finance ( email )

224 Middlebush Hall
Columbia, MO 65211
United States
573-882-5357 (Phone)
573-884-6296 (Fax)

Sandra J. Huston

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

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