The invitations come in the mail, covered in large print: "Investment Workshop—Free Gourmet Lunch!" "Avoid the Biggest Financial Mistakes Seniors Make!" "Protect Your Financial Security!"
At the lunch, the salmon is accompanied by an investment pitch, with reminders that "there's a high rate of return," and "only a few opportunities are left."
Many of these free lunch seminars are scams aimed at retirees. Nearly six million seniors have attended such seminars in the past three years, the senior advocacy group AARP estimates—although conventional wisdom says that there's no such thing as a free lunch. Despite their years of experience, however, older people are more likely to err in their financial decisions by overemphasizing potential benefits and downplaying potential risks. Now insights from psychology, economics and neuroscience may help us understand why and how those errors occur.
Older adults aren't as upset by possible financial losses as young people are, psychological research has shown, and Stanford University researchers found in a recent brain-imaging study that seniors' brains don't anticipate a loss as much as younger ones do. That might be leading them to make less rational—and therefore less profitable—choices. But the news isn't all bad; a better understanding of why these mistakes happen may make it easier to prevent them.
How aging affects financial choices
Economists have studied how aging impacts real-life financial behavior. Harvard University economist David Laibson and his colleagues looked at a variety of choices people make about loans and credit cards, in a study in 2009. They found that people on the younger and older ends of the age spectrum ended up making more mistakes—that is, decisions that cost them money—than did middle-aged people. For home equity loans, for instance, 25-year-olds and 80-year-olds had loans with annual percentage rates of about 6 percent; 50-year-olds had rates of 5.5 percent. On average, across the different types of choices, people made the fewest mistakes at age 53.
Good financial choices require both strategy and execution, an understanding of how financial systems work, and the mental acuity to find and choose the best option. Strategy becomes easier with age, Laibson suggests, but the execution gets harder. "Experience brings improvement," he says, "but after a point, that accumulation of experience starts to get overwhelmed by decline of cognitive function."
This hypothesis matches up with what psychologists know about cognitive aging. "There's a pretty straightforward story," says Scott Huettel, a cognitive neuroscientist who studies decision-making and aging at Duke University's Center for Cognitive Neuroscience. "More or less all of our cognitive abilities decline throughout the life span." A large body of research has shown that a wide variety of skills, including memory, analytical reasoning and processing speed, decrease as we age. The one thing that stays constant or even increases, Huettel says, is crystallized intelligence, a person's accrued knowledge about the world—in other words, experience.
But it's not just memory and reasoning that matter. "We use our gut feelings and our emotions to guide us to make decisions," says Mara Mather, a psychologist who studies aging, emotion and memory at the University of Southern California School of Gerontology. Contrary to stereotype, older people generally feel more optimistic than young people do, and are more likely to focus on the potential upsides of a situation. As people age and begin to feel that their time is limited, some researchers suggest, they seek out emotional fulfillment. This tendency to focus on the positive changes the decisions older people make.