Older adults have 'toxic combination' of lower financial literacy, higher self-confidence

May 9, 2016, University of Missouri-Columbia

Previous studies have shown that as humans age, cognitive declines are inevitable. Now, a recent study by researchers at the University of Missouri and Texas Tech University has confirmed that this cognitive decline extends into financial literacy. The researchers also found that older individuals retain a strong sense of self-confidence, which could add to the problem, leading to significant mistakes when making financial decisions.

"Mixing a decline of with an increase in self-confidence is a toxic combination," said John Howe, professor and chair of the Department of Finance in the Trulaske College of Business. "This opens the door for more honest mistakes as well as fraud. It's widely known that older adults are very common victims of financial fraud. It's important that as we age, we find someone who has our best interests in mind when managing our finances."

In the study, Howe and his colleagues, Michael Finke and Sandra Huston from Texas Tech University, surveyed more than 3,850 individuals 60 and older and found that they experienced increasing declines in financial literacy, which is the ability to understand and make good decisions about . The researchers also found that the participants' self-confidence increased slightly. This meant that even though they didn't understand financial terms or policies well, they still believed they could make good decisions about their personal finances.

Howe recommends finding a who has a good reputation; however, hiring the first mentioned is also not a good idea. Howe says that investors should talk with family and friends and look for advisers who have good records and are willing to take the time to answer all of your questions.

"It is important to find an adviser who has your best interests at heart," Howe said. "Be sure to understand how your adviser is paid—fees, commissions, and so forth—as that can affect their perspective. Investors should expect to pay for good financial advice; it will save them thousands of dollars in the long run."

Howe said it's tough to know when the cognitive declines will begin, so it's a good idea to make a financial checkup a part of an annual doctor visit. During the medical visit, Howe recommends asking the doctor about any signs of cognitive declines. Following the doctor's visit, it's a good time to check in with a financial adviser and make sure every financial decision being made is clear, Howe said.

The study, "Old Age and the Decline in Financial Literacy," is available online and will be published in an upcoming issue of Management Science.

Explore further: Report shows millennials have high debt and little savings

More information: Click here to answer some of the questions the researchers asked participants during the study: missouri.qualtrics.com/SE/?SID=SV_efmvyNNlANLTSVT

Related Stories

Report shows millennials have high debt and little savings

January 14, 2016

High debt, low savings and a lack of financial literacy are the unfortunate hallmarks of millennial financial health, according to a new report developed by the George Washington University Global Financial Literacy Excellence ...

Buying high in the stock market caused by overconfidence

April 11, 2016

The golden rule for investing has always been "buy low, sell high." Past research has shown that many people make the common investing mistake of selling stocks at a low price after the stock market has experienced a decline. ...

Debunking aging myths in financial decisions

January 14, 2015

Growing older leaves many with a gloomy prognosis, namely that cognitive aging will slow the mind and the ability to make decisions. However, when it comes to making financial decisions, many baby boomers would be pleased ...

Recommended for you

Oldest evidence for animals found

October 15, 2018

Researchers at the University of California, Riverside, have found the oldest clue yet of animal life, dating back at least 100 million years before the famous Cambrian explosion of animal fossils.

0 comments

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.