Financial wisdom as we age

The
Peak Age of Financial Reason
,” an article appearing today on smartmoney.com, addresses a topic we covered in Cerebrum earlier this year: the idea that our financial decision-making can
suffer as we age. In Cerebrum,
Natalie Denburg and Lyndsay Harshman outline research that links
decision-making deficits to abnormalities in the prefrontal cortex. The authors
suggest that such problems often occur in the elderly but that they should be
considered neither a part of normal aging nor a sign of Alzheimer’s or other
dementia.

The Smart Money article takes a behavioral economics
perspective and focuses on a not-yet-published
paper
by Harvard economist David Laibson and colleagues (including two
Federal Reserve employees), who suggest that our ability to make good financial
decisions is all downhill after age 53 because of the deterioration of our bodies
and brains.

I’m not sure I buy the specificity of this “peak” age, but some
of the economists’ guidance for how older people can avoid making mistakes goes
hand-in-hand with Denburg and Harshman’s suggestions. For example, the Cerebrum authors note that people may
not be aware that their decision-making abilities have diminished. Addressing
that possibility, Laibson suggests planning ahead, such as by giving someone—a
spouse or grown child, ideally—power of attorney in case of incapacitation. Both
articles also suggest that legal protections could help manage the problem.

In my introduction to the Cerebrum article, I wrote about two incidents of poor financial
decision-making, related by people close to me, that occurred days apart. I
hope that these articles raise awareness and encourage people to prepare well.
The fewer such stories we hear, the better.

–Dan Gordon

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