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Financial Decision-Making and Aging: Perspectives from Neuroscience

3/15/2016, 6:30 PM to 8:30 PM | German House New York

Financial Decision-Making and Aging: Perspectives from Neuroscience

• WZB Berlin Social Science Center
• German Center for Research and Innovation (GCRI)

On March 15, 2016, the German Center for Research and Innovation and the WZB Berlin Social Science Center held a panel discussion in New York City on how investment behavior changes over the adult lifespan and how these changes might be related to changing neural processes underlying decision-making.

The connection between cognitive aging and neuroeconomics is something that affects us all, according to the panel’s first speaker Prof. Dr. Peter Mohr, who leads the WZB Berlin Social Science Center and Junior Research Group Neuroeconomics at the Freie Universität Berlin. The WZB conducts basic research focusing on present-day issues in today’s globalized world. Some of the center’s research areas include migration and diversity, international politics and law, and dynamics of political systems, society, and the economy.

Mohr argued that this topic of financial decision-making and aging is applicable to everyone because, at least in industrial countries, everyone needs to have private retirement savings. He presented findings on typical structures of saving, investing, and private capital spending, raising the question of how individuals of different ages vary in the aforementioned areas. Providing the context of financial decision theory, Mohr showed the relationship between the expected return on and risk of an investment, something everyone should consider when investing. This process takes part in the region of the brain where emotions are processed. Risk, for example, creates an aversive reaction in the same area of the brain that emotions like disgust do. These findings led to the so-called risk-as-feelings hypothesis, in which cognitive evaluation plays the same role that emotions and feelings do to influence decision-making and behavior and hence outcomes, just like financial decisions.

So how do investment behaviors change as people age? The effects of aging, namely a decline in processing speed and working memory in addition to improved regulation of emotions, may coincide with a reduced willingness to accept risks, according to Mohr. He spoke about an experiment conducted at his research center designed to find out one’s willingness to take risks. Surprisingly, at first his center’s findings showed that there were no differences at all in this regard. When taking a closer look at the choice of investment strategies used, however, the results between younger and older people differed – with the elderly relying much more on counting strategies rather than variability strategies. One can also see differences in brain activity between younger and older adults with respect to the act of decision-making itself. Risk again, as an example, activates many more parts of the brain in younger adults than in older adults. The German researchers’ assumption was that the elderly suppress their emotions so that they can instead rely on heuristic decisions. The conclusion Mohr presented depicts that older people do not make fewer risky choices, but rather seem to rely more on easy cognitive decision strategies. In other words, emotions play a less important role in financial decision-making for older adults.

The second speaker was Prof. Dr. Elke U. Weber, Professor of International Business at Columbia Business School and Professor of Psychology and Earth Institute Professor at Columbia University. She agreed that the topic of financial decision-making and aging is of increasing importance, especially as Western countries’ population structures age. She presented statistics indicating that people above the age of 65 hold well over 40 percent of all wealth assets. The psychologist by training and experienced economist then presented findings on how people make financial decisions. Rationality and the idea of a permanent income life cycle hypothesis play a major part in one’s investing over a lifetime. People basically know how much money they will need throughout their lives and act accordingly.

But what challenges do declining cognitive abilities in the elderly pose to their ability to make adequate financial decisions? One example, according to Weber, is that the elderly are much more likely to become the target of fraud. She then continued by posing a variety of related questions: Are financial institutions responsible for detecting bad financial decisions? What role should public policy play? Offering a more positive take on the relationship between aging and decision-making, Weber presented the concept of crystallized intelligence. This term describes the elderly brain as advanced with respect to intellectual capital and experiences. Crystallized intelligence is a stable depository of knowledge acquired through culture, education, and life experience. Weber spoke about the research she has conducted on this form of intelligence as well as her investigation of fluid intelligence, such as processing speed and memory capacity. How do these two forms of intelligence interact to help individuals make wise decisions, one might ask? Weber called this a compensating cognitive competency hypothesis, going off of the idea that crystallized intelligence and fluid intelligence contribute to our ability to make good decisions. While they both change with age, crystallized intelligence increases with age, whereas fluid intelligence decreases, resulting in a surprisingly balanced decision performance or even better decision performance for older adults in the end. This means that aging does, in fact, influence your financial decisions and decision-making between younger and older people differs greatly, but not necessarily with one age group having an advantage over the other.

Weber also presented very interesting findings on changing levels of patience as well as financial and debt literacy over the course of a lifetime, which all peak at “the golden age of reason” around the age of 55 and decline thereafter. She spoke about the desirable role of policy makers supporting the elderly with regulatory conditions and financial institutions providing them with suitable products. Furthermore, she spoke about choice architecture, i.e. how different options are framed and how previous experiences influence our decisions. To this, Mohr added that these findings are not only important on a societal level, but also on a more micro-level, such as in the workplace. Both speakers agreed that in this case, age diversity is an important factor.

Dr. Joann Halpern, Director of the German Center for Research and Innovation, moderated the ensuing discussion. Topics addressed during the Q&A revolved around ways that artificial intelligence is assisting the elderly by substituting cognitive competencies and the role the financial crisis has played in changing how we think about financial decision-making in general. Members of the audience also broached subjects, such as the distinction between experience and accumulated knowledge, the emotions of fear and greed as drivers of investment, and the rapidly changing global environment in which we live.

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  • Featured Speakers

    • Prof. Dr. Elke U. Weber

      Jerome A. Chazen Professor of International Business, Columbia Business School; Professor of Psychology and Earth Institute Professor, Columbia University

    • Prof. Dr. Peter Mohr

      Head of the WZB Berlin Social Science Center and Freie Universität Berlin Junior Research Group Neuroeconomics

    • Dr. Joann Halpern (Moderator)

      Director, German Center for Research and Innovation