Cognitive abilities, self-efficacy, and financial behavior

April 2021

The number of older Americans has risen dramatically in recent decades, and they are taking increasing responsibility for managing their accumulated wealth.

Summary

Evidence from the aging literature indicates that cognitive abilities decline sharply after age 60. This deterioration could make older adults vulnerable to financial management inefficiency, which can affect their financial well-being and has broad implications on society. Yet despite the growing salience of the issue, our understanding of factors that contribute to financial behavior among older adults is limited. This paper examines how cognitive aging, a normal and inevitable consequence of biological aging, affects the financial well-being of the older population.

Key Insights
Cognitive abilities significantly affect financial behavior among older adults through both ability and self-efficacy channels.
Higher cognitive abilities predict more efficient financial behavior, after controlling for other determinant factors of financial behavior.
The positive effect of cognitive abilities on financial behavior is especially strong among tasks requiring analytical and information-processing skills.
Lower cognitive abilities decrease self-efficacy, which in turn leads to lower financial-management efficiency.
Methodology

The paper’s findings are based on an analysis of longitudinal data from the U.S. Health and Retirement Study, a nationally representative study of Americans over age 50.