From Science Daily:

In 2014, 75.4 million Baby Boomers lived in the United States, according to Pew Research. As this generation continues to age, dialogue will increase on how to manage concerns associated with aging, such as the decline in cognitive ability and retirement decisions. Now, a researcher at the University of Missouri has found that older individuals with lower cognitive abilities are susceptible to behavioral biases, such as being adverse to upfront costs. Michael Guillemette, an assistant professor of personal financial planning in the University of Missouri’s College of Human Environmental Sciences, says that risk aversion, along with lower cognitive ability among older Americans, might explain the lack of demand for certain retirement savings products.

“Some financial products, such as annuities, have upfront costs,” Guillemette said. “With a pure-life annuity, an individual will pay an upfront cost that is typically $50,000 or higher and in exchange will receive monthly payments for life. The risk associated with annuities comes from the uncertainty of death. If the full amount of the annuity is not paid out prior to the death of the recipient, the money is lost. In our study, an upfront cost caused people with lower cognitive abilities to shy away from future risky decisions.”

In the study, Guillemette and his coauthors Chris Browning and Patrick Payne from Texas Tech University, measured participants’ cognitive function by evaluating respondents’ working memory and numeracy. The analysis considered two hypothetical risky financial prospects, both with equivalent expected returns, but one situation included an upfront cost and…

Continue Reading