Our financial decision-making peaks at 53

Sarah Coles
Senior woman having headache
Senior woman having headache

We don't get wiser with age in every aspect of our lives. A new study from Harvard University has suggested that when it comes to money we get progressively wiser until the age of 53 - and then it's downhill all the way from there.

According to The Telegraph, the researchers claimed that when we start out in life we don't have the experience to factor into decision-making in order to improve the outcomes, so as we get older we get more experienced, and therefore better at making choices about money.

However, when we hit the age of 53, apparently, it all goes awry, because cognitive ability gets worse around this age and we lose the ability to make new decisions. And as we get older, our ability to make reasoned decisions declines even further, until half of all pensioners in their mid-80s are in no position at all to make sensible financial choices.

This reflects earlier work on the same kind of issue. A study at Yale last year found that older people made poor financial decisions more often than younger ones - even when they had the same IQ. They gave people of all ages a number of financial decisions involving risk and reward - each of which had a clear right answer. The older people were more likely to make the wrong decision - being too cautious about possible gains and not cautious enough when it came to weighing up losses.

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Should we be concerned?

The results come at an interesting time, because people in their 50s and 60s are expected to make some of the hardest financial decisions of their lives - around what to do with their pension pot. The government has been piling an ever-increasing number of complicated options onto the shoulders of those reaching retirement, so it's alarming to hear that we may not be in a position to make the best financial choice for our future.

The government-run occupational pension scheme, Nest, has been so worried by the findings that it is calling on the industry to redesign pensions to enable people to make the tough decisions earlier in their 50s.

We all make bad decisions

The findings, however, will come as no surprise to behavioural finance professionals, who have long-argued that we're not in a pos

ition to make the right decisions for our own financial future at any time in our lives.

According to this field of study, we don't usually make financial decisions at all: we rely on short-cuts. The Harvard researchers mentioned the role of experience, because one of the most widely used shortcuts is just to consider what you did last time you were in the same position, and whether it worked out OK for you at that stage. In by far the majority of all the financial decisions we make, this is as far as we get in weighing up the options.
And while there will be times these short-cuts work, they could never be the answer to the kinds of questions people will face at retirement. To begin with, in order to know the right approach to what to do with your finances in retirement you need to know how long you are going to live - which means most of us are gong to be relying on guesswork.

The other major issue is that the government is working too hard to give us too many options. The human brain isn't designed to deal with multiple options: any more than four and we just get overwhelmed and go with whatever most other people are opting for.

These experts say that it isn't impossible to make good decisions, as long as you are aware of your limitations, but that it's far safer to rely on a professional when it comes to making the biggest financial decisions in our lives.

But what do you think? Are they right? Or can people of any age make excellent financial decisions as long as they apply themselves?

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