Aging, Cognitive Decline, and Financial Decision-Making
Increasingly longer lifespans present new challenges and risks for older adults and their families. One such risk is cognitive decline, a serious issue that leaves older adults both susceptible to making suboptimal financial decisions and vulnerable to financial exploitation and abuse. Researchers have consistently found a strong relationship between healthy executive functions and good financial decision-making. The significance of healthy executive functioning suggests that family members and financial professionals alike need to be on the lookout for signs of confusion, disorganization, impulsivity, and disorientation. If any such symptoms are present, these observers need to adjust their actions and recommendations accordingly. Importantly, someone with executive function deficiencies is unlikely to be able to complete a conventional risk tolerance questionnaire with any degree of reliability, and the results of any such questionnaire could in fact generate investment recommendations that are highly inappropriate.
Research also shows older adults are more likely to make questionable financial decisions while in a heightened emotional state, or while they are depressed, lonely, or overconfident. The increased social isolation brought on by COVID-19 has very likely made many older adults even more vulnerable to making poor financial decisions and being exploited. An important conclusion from the research conducted on the behavioral aspects of financial decision-making indicates that even individuals who can pass a cognitive screening test commonly used by medical practitioners could still be highly susceptible to poor financial decision-making or to being exploited.