The acuity of peoples' financial decision-making peaks around the age of 53 and then declines steadily along with their diminishing cognitive capabilities, finds a new Brookings Institution study, "The Age of Reason: Financial Decisions Over the Life-Cycle With Implications for Regulation."
While young people make poor decisions due to inexperience, they typically have less to lose and more time to recover from their mistakes. Older Americans, by contrast, have amassed considerable net worth $239,000 was the median figure in 2007 and they often have complex balance sheets, including home equity loans, credit card balances and installment loans, with the result that mistakes cost them more.
Peaks and declines
Cognitive functions such as memory, reasoning, spatial perception and pattern recognition peak around age 20, decline at the rate of about 1 percent annually and then deteriorate rapidly among individuals afflicted by various types of dementia. On the other hand, experience, which aids decision making, increases with age. The combination of experience plus cognitive capabilities peak in the early 50s, then decline.
Drawing upon a database of 10 types of financial choices such as the transfer of credit card balances and negotiation of home-equity loan interest rates, the authors find that people in their late 40s and early 50s are the most adept at making the optimal financial decisions.
