Although it is commonly believed that cognitive abilities decline after middle age, researchers led by Agnieszka Tymula of the University of Sydney wanted to understand the finer points of this process. They focused an investigation on choice and decision-making and soon discovered that the ability to make rational choices changes with age. What may be surprising to many, though, is that older adults were not making “too cautious” choices, as is traditionally assumed. In fact, the choices of elders might be seen as much too risky.

Experimental Design

To explore individual preferences for both known and unknown risks, the researchers enrolled a total of 135 healthy subjects to participate in their experiment: 33 of the participants were between the ages of 12 and 17 (adolescent); 34 between 21 and 25 (young adults); 32 between 30 and 50 (midlife adults); and 36 between 65 and 90 (older adults). The researchers tested and excluded any subject who showed signs of dementia. And for all the participants, they gathered detailed demographic, financial, and psychological information (including IQ). Roughly half the participants were female, and the other half were male.

Next, participants read instructions for the trials they were about to join as well as rules on stimuli and payment; they were only allowed to proceed if they correctly answered questions about comprehension. Next, the participants completed a series of practice trials, with no time limit, to familiarize themselves with the choices they would face for the experiment. Essentially, they would be choosing whether or not to enter a lottery.

In gain trials, subjects would be choosing between being given $5 or participating in a lottery. In some cases, the lottery was risky — gain was only probable — or the lottery was ambiguous — amount of gain was uncertain. Loss trials were identical to gain trials, except all amounts were negative. For instance, in a risky ‘loss’ trial, each subject would face a choice between losing $5 for sure or equal chances of losing $8 or losing nothing.

Finally, the researchers instructed the participants to make 320 choices: 160 gain trials and 160 loss trials.

Let the Games Begin

What did the researchers discover?

They found that the adults 65 and older made strikingly inconsistent choices compared with younger individuals. In the area of gain, the older participants took fewer risks than their younger peers. However, in the area of loss, the elders were more risk-seeking than their younger peers. Despite clear evidence that they understood the tasks well, even the older adults who met high criteria for mental well-being and mental health showed striking and costly inconsistencies in their choice behavior.

“In effect, elders lose income from being too cautious in the domain of gains and from being too incautious in the domain of losses,” wrote the authors in their paper. “Our results also make an important point: Findings obtained studying preferences in the domain of gains should not be immediately generalized to the domain of losses.”

The researchers hypothesize that older participants suffer a seeming loss in the cognitive ability to make rational choices, which is similar to other age-related declines. In fact, a growing body of literature indicates that older adults are making decisions detrimental to their well-being. “Large-scale future studies will, of course, now be required to understand how decision-making changes as a function of age across the human population,” wrote the authors.

Wealth Management Over Time

In an unrelated study, Brookings Institute researchers found that older and younger individuals are more likely to pay higher prices for financial products, including mortgages, credit cards, and auto loans, than individuals in their middle years. They arrived at this conclusion by reviewing the literature on cognitive function and by analyzing the actual financial practices of a cross section of prime borrowers. After averaging results across 10 different types of credit transactions, the researchers found that middle-aged adults borrow at lower interest rates and pay less in fees than do either younger or older adults. In fact, fee and interest payments are minimized around age 53.

“Middle-aged adults may be at a decision-making sweet spot: they have substantial practical experience and have not yet suffered significant declines in fluid intelligence,” wrote the authors.

When describing cognitive ability, psychologists generally divide intelligence into two areas. Fluid intelligence, often called fluid reasoning, is commonly understood as the capacity to solve problems independent of acquired knowledge. Such information processing skills include the ability to think rationally about a new problem, to analyze and identify patterns and relationships, and then to logically extrapolate an answer. Crystallized intelligence is what most of us call experience. It is the ability to access and use already acquired skills and knowledge.

At least in terms of decision-making, the maligned years at the middle of life appear to be a kind of oasis.

 

Sources: Agarwal S, Driscoll J, Gabaix X, Laibson D. The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation. Brookings Papers on Economic Activity. 2009.

Tymula A, Rosenberg-Belmaker LA, Ruderman L, et al. Like cognitive function, decision making across the life span shows profound age-related changes. PNAS. 2013.