Australia markets closed

Why older is not wiser in money matters

Wisdom is supposed to be one of the benefits of ageing but new research shows that over-65s make poor financial decisions that cause them to lose much more money than younger people.

Older people are not only less rational in decision-making, they are also more likely to choose options that risk greater losses, a joint study involving the University of Sydney has found.

The findings raise questions about whether current retirement policy guidelines make enough allowance for the capabilities of older people, particularly as more Australians take charge of their retirement through self-managed superannuation.

Dr Agnieszka Tymula, from the University of Sydney's School of Economics, said the study examined attitudes to risk across four age groups: adolescents, young adults, mid-life adults and older adults.

The results showed older adults - those aged 65 to 90 - made decisions throughout a series of money-related choices that resulted in them making around 40 per cent less than adults aged from 21 to 50.

"For example, we asked our older adults and all participants questions like `would you like to receive $5 for sure or $5 only with 50 per cent probability'," Dr Tymula said.

"In these questions we saw a very sharp increase in rationality violations in older adults. They would go for the lottery more frequently than younger people."

Dr Tymula, a researcher in behavioural economics, said part of the lower returns for older adults was due to them having a lower tolerance for risk in money-making strategies.

However, they also had a higher tolerance for risk and made more irrational decisions when choices involved potential loss of money.

"We found that older adults were the most risk-seeking group of all, which I think goes against some of the common views we have of older adults as being very cautious," Dr Tymula said.

The end result was a double-whammy for over-65s: making less money on profitable ventures and losing more on loss-making ones.

The researchers, from the University of Sydney, New York University and Yale University's School of Medicine, found the results held true regardless of IQ levels, education and numeracy.

Dr Tymula said age-related changes in the brain could explain some of the results.

"We know, for example, that there is general reduction in cognitive function with ageing that is mainly driven by the decline in neural structure and function," she said.

Dr Tymula said the findings needed more work to relate to complex real-life decisions but identified potential shortfalls in understanding the financial abilities of older people.

"It makes us aware that deciding how to design your retirement while you are young is tricky because your preferences are different," she said.

"On the other hand, you should be aware that at some point you will become a less-rational and less-consistent decision maker and you should try to prepare yourself against this.

"Policymakers, families, doctors should be aware that there are these profound differences in choice behaviour observed in older adults."

The study was published in the journal Proceedings of the National Academy of Sciences.