The Age of Financial Reason
Image by Bengt Nyman via Flickr
Your ability to make financial decisions doesn’t stay constant with age. When you’re young, your mind is sharp but you don’t know much. When you’re old, you know a lot (errr… maybe), but your mind is (on average) in decline.
A new study (abstract) tries to pinpoint the age of your peak financial decision-making. Where do they peg it?:
We study life cycle patterns in financial mistakes using a proprietary database that measures ten different types of credit behavior. Financial mistakes include suboptimal use of credit card balance transfer offers, misestimation of the value of one’s house, and excess interest rate and fee payments. In a cross-section of prime borrowers, middle-aged adults make fewer financial mistakes than younger and older adults. We conclude that financial mistakes follow a U-shaped pattern, with the cost-minimizing performance occurring around age 53.
So: 53. Yes, I can hear the complaints now: “I’m 73 and I’m as sharp as ever youranasshole getoffmylawn…” Remember, these are averages. Maybe you’re an unusually savvy young person or an unusually sharp older person. Or, maybe, you’re a particularly slow young person or a relatively unwise older person. Everyone thinks they’re above average — most, by definition, are wrong.
So, is there anything to be done about it?
The authors of the study suggest a few ideas: making people take a financial “driving test,” showing they know what they’re doing before being let out of “safe harbor” investments; requiring the elderly to have “financial advance directives,” tying themselves to safe harbor investments or appointing financial guardians, before they become elderly (that is, set their decisions in motion before age 70); requiring all financial products to be approved by the government, on an FDA-type model.
These would all be a pretty hefty dose of paternalism. While the problem of elderly people and money is a real one, this level of intrusion is simply beyond the government’s proper powers and would never be acceptable even if it were within the government’s powers. And what about young people? They’re often just as incompetent, if not more so, and their early mistakes are compounded over a lifetime.
It’s scary how our minds decline. And families should plan for parents’ old age. But cognitive decline doesn’t mean the elderly have no rights.
HT: Vanguard
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Ryan,
These safe harbor investments you mention, aren’t those the investments that we all thought we were making before the financial crisis? And these financial guardians, aren’t these the people who we were giving our money to for investment? Government approval would curb some of the egregious investing that has occurred but it would also make out system a lot less capitalistic and it would cut down on the free market and that would never fly. But still it’s a good idea to pair the rise and decline of our minds with what we expect from our finances at that age.
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