How to help the elderly make better investment decisions

Capitalstars Investment Advisor

At times older people find it difficult to sift unimportant information from the more important ones or shift from one objective to another while evaluating something.

We were at a store to buy a blanket for my aunt. To say she was overwhelmed is an understatement. Row upon row of materials, colors, and prices left her exhausted. My aunt told me that age was not on her side. How does aging affect our decision making?

Behavioral scientists say decisions are made using thumb rules and shortcuts, rather than a rational process. As one age, one tends to lean more on “satisficing” solutions while making decisions, rather than trying to optimize. My aunt was willing to take any blanket that seemed fine and was priced reasonably. She did not need more choices.

As we age, we find information overload tiring. This can have important consequences on financial decisions we make. We lean on the familiar, go with past experiences, and invest in choices we are familiar with. What is seen as unwillingness to change is actually a manifestation of the inability to deal with new and complex information.

We don’t stop learning as we age. What we process and how we do it changes. Implicit subconscious memory of events, people and places do not change. My aunt can recount instances from her childhood in vivid detail. Ask her the name of the film we saw the previous week, she would not be too sure.

With age our ability to make the effort and use our working memory to associate specific information with specific people, products or processes deteriorates. Our sematic memory is not susceptible to deterioration. Therefore we find that older people find it difficult to sift unimportant information from the more important ones, deal with complex features of a product, or shift from one objective to another while evaluating something.

The fixation about earning a regular income comes from the association of this investment feature with its performance. A regular dividend paying stock, an interest earning bond, a steady stream of rental income, are all associated with investment features that secure retirement income. The elderly find it comfortable to understand return in terms of income, rather than growth.

When mutual funds introduced the systematic withdrawal plan, they were catering to this target group that liked a fixed amount to be credited to the account every month. However, pandemonium broke when a retired investor walked into our office and demanded to know how liquidating his own investment to pay him was an accepted practice. No amount of explaining that the invested amount has grown in value helped.

We also noticed with dismay that investors were willing to accept single-digit returns on annuities offered by insurance companies, and were willing to stake their retirement corpus in a fixed deposit scheme of an unknown finance company. But robust ideas such as diversification and asset allocation were met with much resistance.

As younger investors began to opt for SIPs and stayed with them through ups and downs of the market, familiarity with risky growth products increased. Such investors were more willing to consider growth investments for retirement planning. The elderly took their time to experience the product, and after making sure that the monthly income plans actually gave out a regular cheque they began to trust the product. Dividend-paying funds are still a favorite with this audience.

The second aspect is the personal relevance of the decision on hand. As we age, we are keen to understand how a decision impacts our life. As our cognitive abilities decline, we are unable to subject decisions to deliberative processing. We rely on simpler interpretations about how it affects us, lean on our experiences, and decide based on our needs. Unwillingness to follow prescribed diets, medication and exercise regimens by the elderly is seen as illustrative of the lack of deliberate processing before a condition gets worse. Elders may not be able to perceive risks in a fixed deposit, as long as interest is being paid their own time.

The third aspect that aids elderly investors is expertise. Those with knowledge and skill about financial products do much better than those who have to deal with the complexities of finance after they retire. There is a great need for financial education for the soon-to-retire population that has to know to save, invest and drawdown.