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Self-assessed cognitive ability and financial wealth: Are people aware of their cognitive decline?

Author

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  • Fabrizio Mazzonna

    (Università della Svizzera Italiana)

  • Franco Peracchi

    (Georgetown University and EIEF)

Abstract

We investigate whether people correctly perceive their own cognitive decline and the potential financial consequences of misperception. Using longitudinal data from the Health and Retirement Survey, we examine the relationship between self-ratings of memory ability and assessed memory performance and show that older people tend to underestimate their own cognitive decline. We then investigate the financial consequences of this underestimation. We show that respondents who experience a severe cognitive decline across waves, but are unaware of it, are more likely to experience financial losses. Finally, we examine potential explanations for the patterns of wealth changes observed among respondents who are unaware of their cognitive decline. Our findings support the view that financial losses among unaware respondents reflect bad financial decisions, not rational disinvestment strategies.

Suggested Citation

  • Fabrizio Mazzonna & Franco Peracchi, 2018. "Self-assessed cognitive ability and financial wealth: Are people aware of their cognitive decline?," EIEF Working Papers Series 1808, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2018.
    • Handle: RePEc:eie:wpaper:1808
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    References listed on IDEAS

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    Cited by:

    1. Kim, Hugh H. & Maurer, Raimond & Mitchell, Olivia S., 2021. "How financial literacy shapes the demand for financial advice at older ages," The Journal of the Economics of Ageing, Elsevier, vol. 20(C).
    2. Hugh Hoikwang Kim & Raimond Maurer & Olivia S. Mitchell, 2019. "How Cognitive Ability and Financial Literacy Shape the Demand for Financial Advice at Older Ages," NBER Working Papers 25750, National Bureau of Economic Research, Inc.
    3. Olivia S. Mitchell, 2020. "Building Better Retirement Systems in the Wake of the Global Pandemic," NBER Working Papers 27261, National Bureau of Economic Research, Inc.
    4. Paul Gerrans & Anthony Asher & Joanne Kaa Earl, 2022. "Cognitive functioning, financial literacy, and judgment in older age," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1637-1674, April.

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