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Financial decision making for and in old age


Rafal Chomik, Gaoyun (Sophie) Yan, Kaarin Anstey, and Hazel Bateman

The typical process of decision making can take two forms. It can be slow and deliberative – where a problem is formulated, alternative options are identified, systematically compared against preferences, then selected; and acted upon. Or it can be instant and impulsive – where we respond to the emotional and intuitive aspects of the problem, using rules of thumb, gut instinct, and shortcuts that limit our cognitive load (often referred to as heuristics).

Both methods can fail us when making financial decisions. Deliberative thinking won’t get us far if we don’t understand the concepts (e.g., whether about interest, incidence, or inflation) or if our memory fails us when trying to compare options (e.g., whether spending plans or investments). And impulsive thinking can mislead us when biases creep in.

This brief assesses how these decision processes can go wrong and how we can put them right. It evaluates the age profiles of financial literacy and cognitive ability on the one hand and behavioural biases and mental shortcuts on the other. In doing so, it describes the types of interventions that help boost our abilities and nudge our behaviour, improving financial decisions in the process.

The focus of this brief is on decisions related to personal retirement finances, which in Australia are overwhelmingly about superannuation – the individual savings pillar of the retirement income system (even though housing assets make up a greater proportion of wealth). Much of the presented research relates to super, with considerable attention given to the topic of the moment: the decumulation of super. But examples touch on and can be applied to other financial decisions related to housing, insurance, aged care, and retirement from work.