With Age Comes (Economic) Wisdom

(Photo: Garry Knight)

(Photo: Garry Knight)

A new study seems to confirm the adage that older means wiser, at least when it comes to making decisions about economic matters. From ScienceDaily:

To conduct their research, [Ye] Li and his colleagues recruited a group of 336 people — 173 younger (ages 18 to 29) and 163 older (ages 60 to 82) — and asked them a series of questions that measured economic decision making traits. They also administered a battery of standard fluid and crystallized intelligence tests.

These traits included temporal discounting (how much people discount future gains and losses), loss aversion (how much the valuation of losses outweigh gains of the same magnitude), financial literacy (understanding financial information and decisions) and debt literacy (understanding debt contracts and interest rates).

They found the older participants performed as well or better than the younger participants in all four decision-making measures. The older group exhibited greater patience in temporal discounting and better financial and debt literacy. The older participants were somewhat less loss averse, but the result did not reach standard levels of significance.

“The findings confirm our hypothesis that experience and acquired knowledge from a lifetime of decision making offset the declining ability to learn new information,” Li said.

(HT: R.E. Riker)

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COMMENTS: 7


  1. Derrell Durrett says:

    Surely the temporal discounts that apply to a decision for a 65-year-old (or 80-year-old) are very different than the temporal discounts that apply to a 15-year-old or a 25-year-old. Leaving aside questions of brain development, this fact alone makes me wonder about the validity of the conclusions presented here. I’d assert that by many standards an 80-year-old ought to be considered someone for whom a very clear idea of their own mortality might legitimately cause them to behave economically in ways which would be imprudent for a younger (or simply less time-limited) person.

    Am I missing something?

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    • Troy says:

      Well then I suppose you would have to conduct an entirely separate study on the psychological effects of mortality on these demographics. As far as I see it, an elderly person could have two very dissimilar economic perspectives…

      First, the perspective that since they’re “on their way out”, so to speak, they have no qualms about spending frivolously.

      Second, the perspective that since they’re leaving behind family members, they should save as much as possible in order to ensure a hefty inheritance for their beneficiaries.

      There is no easy way to determine which perspective might be prevalent in the demographic, so I would assert that your assertion is rather presumptuous.

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    • Ryan says:

      I had this same thought. I’m no experimental designer, but my best guess was that there was something factoring out the personal element in the experiment. For (bad) example, perhaps participants were asked to offer economic advice to a hypothetical decision maker, and this decision maker was the same age in each trial?

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  2. John McKay says:

    I think they’re saying that older people were more willing to wait for rewards, wouldn’t pay as much of a premium to get something today versus next week or next month. If mortality were a factor, you’d expect older folks to be more, not less, willing a premium for short term rewards.

    On the other hand, the time scale is somewhat different as I’m confident that an 80 year old person experiences the passage of a month, say, much more quickly than a 15 year old. So, perhaps waiting a month is, for a 15 year old, experienced much as waiting 6 months is experienced by an 80 year old.

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  3. Kevin G says:

    Time value of money, financial risk accessment, understanding “financial information”, and understanding loans.

    This isn’t a test of economic literacy, this is a test of financial literacy. Finance can be thought of as a branch of economics.

    This is like giving people a test of ornithological knowledge and then calling it a test of biological literacy.

    The authors are professors in a business school, which means they think finance is all of economics. Talk about an echo chamber.

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  4. Deb M says:

    But how much of the difference is actually due to age, and how much to cohort effect? The differences could be due to economic factors when these people were becoming adults and learning how to manage money, vs. being due to age, experience, and “wisdom” only.

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    • El Conquistador says:

      Cohort is certainly the missing link here – nice catch Deb! The other comments are also really good but much more nitpicking stuff. Cohort is the one that can pretty much wipe out their conclusion that “experience and acquired knowledge from a lifetime of decision making offset the declining ability to learn new information”

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