Old Age and the Decline in Financial Literacy
Forthcoming in Management Science
40 Pages Posted: 24 Oct 2011 Last revised: 30 Oct 2015
Date Written: August 24, 2011
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: Suggested Citation