Overconfidence in financial knowledge associated with financial risk tolerance in older adults
Taking excessive financial risk in older age can have harmful, far-reaching consequences as opportunities to recover lost wealth are limited. Better understanding the mechanisms of financial risk taking in older age is critically important for both identifying vulnerabilities in certain older adults and for developing interventions to empower aging investors to make wise financial choices into the most advanced ages. The goals of the present study were to identify age differences in financial literacy, confidence in financial knowledge, and risk taking and how literacy and confidence were related to financial risk taking across older adults with and without cognitive impairment (ages 58–101). Using cross-sectional data from the Rush Memory and Aging Project, analyses revealed that risk aversion was higher and self-reported willingness to take financial risks was lower at older ages. Financial literacy was similar across the sixties and seventies but lower at the oldest ages. However, confidence in financial knowledge was not associated with age when controlling for financial literacy. In exploratory analyses, a measure of overconfidence in financial knowledge was positively associated with self-reported financial risk tolerance but not a behavioral measure of risk aversion. The overconfidence effect on risk tolerance did not vary across individuals with no cognitive impairment or Mild Cognitive Impairment (MCI). Overconfidence accounted for about 6% of the variance in financial risk tolerance. The present results suggest that overconfidence may contribute to risky financial behavior. Calibration of confidence levels to actual literacy is a potential target for future interventions aimed at protecting senior investors.
