Cognitive decline and financial literacy

Paul Gerrans is Professor of Accounting and Finance at the University of Western Australia and a member of the Research Committee of the OECD International Network on Financial Education

As we witness the baby-boomer cohort progress into, and through, retirement we will unfortunately also experience an unprecedented number of older citizens experiencing cognitive decline, given prevailing incidence rates. In the United States, recent evidence suggests one in eight Americans aged 60 years and older reported experiencing worsening confusion or memory loss over a 12-month period. This is at the time when individuals face difficult financial decisions relating to health, housing, and savings. A recent OECD report shows that older cohorts also typically display lower financial literacy than middle-aged adults.

For some this may manifest in dementia, for which the recent OECD report Addressing Dementia suggested “too many people with dementia do not receive a timely diagnosis”. The time period prior to a formal diagnosis of dementia is important, as catching cognitive decline before it impairs judgement is a tricky business. So also is establishing how decline interacts with financial decision-making and financial literacy.

As we age we accumulate what is labelled as crystallised intelligence and many existing financial literacy scales are skewed to measuring this. However fluid intelligence, which relates to problem solving and integrating new information, is more challenging to measure; impacted (negatively) by aging; and less understood in terms of the financial literacy metrics which best correlate with it.

A recent report released by National Seniors Australia, presents results from a study which investigated these issues. The “Better Ways of Assessing Cognitive Health” report focussed on monitoring cognitive functioning, administered different cognitive tests, and assessed two financial literacy scales. The cognitive tests undertaken included a self-assessed measure and three objective measures completed via a computer, iPad, or other device. The report recruited a sample of Australians with retirement savings assets to manage, aged 55 and over. The analysis focussed on a sub-sample of individuals with significant assets to manage and who establish savings structures where they have direct responsibility of their financial decision-making.

The largest group (more than half) of participants in this sub-sample indicated a preference for completing assessments on a computer and at home (75%), rather than with a health professional. The sample was a highly functioning and financially literate one, judged by performance on an established 13-item financial literacy scale with a median score of 9 and 11 correct for females and males respectively. In terms of the cognitive functioning measures, respondents’ self-assessments did not correlate well with objective assessments. This parallels previous evidence that individuals do not always recognise decline and neither necessarily do care-givers.

Notwithstanding the sample being a highly functioning one, the report highlighted that higher levels of objective cognitive functioning were associated with poorer performance on the financial literacy scales. This was especially true for an applied measure of financial literacy designed to align with fluid intelligence, highlighting the need to explore the properties of the financial literacy scale being administered.

The study has importantly established a baseline assessment for a large sample of individuals who will be tracked over time to examine decline in cognitive ability and financial behaviours. The report reinforces the limited evidence that links (cross-sectionally) cognitive ability and financial behaviours, such as mistakes in use of credit cards and housing loan applications. Corresponding evidence linking cognitive decline with financial behaviours is available, for example linked to susceptibility to financial scams, but limited. This is the project’s next step.

Cognitive decline is a confronting issue for many people in old age. So is anxiety about such decline. Much work is needed on better monitoring our functioning as well as gaining a better understanding of the types of financial decisions that might be impacted by that decline.


Useful links
OECD/INFE International Survey of Adult Financial Literacy Competencies
G20/OECD INFE Report on Adult Financial Literacy in G20 Countries
OECD Pensions Outlook 2016 – The role of financial education in supporting decision-making for retirement


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