Age may bring wisdom but not when it comes to your finances

As we age and gain experience we should get wiser, right? We’ve learned a lot from our mistakes and those of others and we gain a sense of calm and deliberation that we may not have had in our younger years. When it comes to finances this may be true only up to a point, the latest cognitive research shows.

Research Magazine recently noted that scientists who study cognitive aging show that a decline in old age is “natural and inevitable,” our brains, like the rest of our body, lose their ability to respond quickly and precisely over time. …Research at the University of Virginia Cognitive Aging Laboratory, for instance, has looked at how people of different ages do when trying to come up with a synonym to a random word, how well they detect patterns, and how well they recall lists of words. These tasks require the ability to process a stimulus and relate it to an item in memory. Research shows that the ability to do that tends to peak in a person’s late 50s.

Studies by the Federal Reserve show that financial behavior, such as limited credit fees and interest rates paid on home equity loans, tends to peak in the late 40s or early 50s. Another study by two professors at the University of Miami shows that risk adjusted investment returns decline with advanced age. They found that investors over age 70 underperform by about 2 percent a year compared to investors who are younger. Other studies from Texas Tech show that the ability to understand financial concepts and apply them appropriately declines by about 2 percent per year after age 60.

Unfortunately for older investors, studies show that while cognitive decision making abilities decline, their confidence in their ability to make good decisions does not.