Cognitive Decline and Financial Decision-Making

Abstract

Older investors unaware of their cognitive decline expose themselves to avoidable financial losses. This paper presents the results of an experimental survey of wealthy older US investors that examines whether making this risk personally salient changes stated financial responses. To guide the design of the survey, we develop a simple model in which a higher cognitive risk reduces the effectiveness of information acquisition and self-management. The survey results show that general information about the financial risks of memory decline has modest effects on stated financial responses, while personalized feedback on respondent’s own memory performance has large effects. Further, these effects are concentrated among respondents classified as unaware of their memory problems: it increases stated preferences for formal delegation by 19 percentage points relative to aware investors, and risk reduction by 18 percentage points, while general information alone has little effect. Evidence from the Health and Retirement Study shows that these margins extend beyond stated preferences: following severe memory loss, people who are aware of their cognitive decline reduce risky-asset holdings and are more likely to delegate financial responsibility than those who are unaware. These results suggest that protecting older investors may require making cognitive risk personally salient, rather than simply providing information about its financial consequences. Joint paper with Franco Peracchi and Andrea Orsenigo.