ABSTRACT
Populations throughout the world are aging. Due to cognitive aging, they face increased limitations on their financial decision-making abilities. The decline in cognitive ability begins in early adulthood and continues throughout life. However, financial experience increases rapidly through the middle years of a person’s life. Thus, young adults are prone to making mistakes because of a lack of experience, while seniors are prone to mistakes because of cognitive decline. The estimates of peak financial decision making range from the forties to the early fifties. This is known as the U-shape of financial mistakes over time. The cognitive decline for seniors impacts their ability to manage investments in several ways. It is shown that seniors lose some of their financial literacy, which negates their experience. Declining cognitive ability results in poor stock picking, market timing, and diversification, resulting in portfolio underperformance. Seniors become more financially risk averse over and above changes in investing needs. Cognitive decline impairs a retiree’s ability to manage emotions and behavioral biases in the investment decision process and make poor decisions after stock market shocks. Finally, cognitive decline makes seniors more susceptible to financial fraud.
