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Dementia risk and financial decision making by older households: the impact of information

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Abstract

The knowledge and reasoning ability needed to manage one's finances is a form of human capital. Alzheimer's disease and other dementias cause progressive declines in cognition that lead to a complete loss of functional capacities. In this paper we analyze the impact of information about cognitive decline on the choice of household financial decision-maker. Using longitudinal data on older married couples, we find that as the financial decision maker's cognition declines, the management of finances is eventually turned over to his cognitively intact spouse, often well after difficulties handling money have already emerged. However, a memory disease diagnosis increases the hazard of switching the financial respondent by over 200% for couples who control their retirement accounts (like 401ks) relative to those who passively receive retirement income. This is consistent with a model of the value of information: households with the most to gain financially from preparation are most responsive to information about cognitive decline.

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  • Joanne W. Hsu & Robert J. Willis, 2013. "Dementia risk and financial decision making by older households: the impact of information," Finance and Economics Discussion Series 2013-45, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2013-45
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    1. Padmaja Ayyagari & David Frisvold, 2016. "The Impact of Social Security Income on Cognitive Function at Older Ages Full Access," American Journal of Health Economics, MIT Press, vol. 2(4), pages 463-488, Fall.
    2. Piotr Bialowolski & Jing Jian Xiao & Dorota Weziak-Bialowolska, 2024. "Do All Savings Matter Equally? Saving Types and Emotional Well-Being Among Older Adults: Evidence from Panel Data," Journal of Family and Economic Issues, Springer, vol. 45(1), pages 88-105, March.
    3. Mazzonna, Fabrizio & Peracchi, Franco, 2020. "Are Older People Aware of Their Cognitive Decline? Misperception and Financial Decision Making," IZA Discussion Papers 13725, Institute of Labor Economics (IZA).
    4. Nicolau Martin‐Bassols & Sonja C. de New & David W. Johnston & Michael A. Shields, 2023. "Cognitive activity at work and the risk of dementia," Health Economics, John Wiley & Sons, Ltd., vol. 32(7), pages 1561-1580, July.
    5. Anek Belbase & Geoffrey T. Sanzenbacher, 2016. "Cognitive Impairment and Social Security's Representative Payee Program," Working Papers, Center for Retirement Research at Boston College wp2016-12, Center for Retirement Research.
    6. Pak, Tae-Young & Babiarz, Patryk, 2018. "Does cognitive aging affect portfolio choice?," Journal of Economic Psychology, Elsevier, vol. 66(C), pages 1-12.
    7. Cheuk Hee Cheung & Tansel Yilmazer, 2019. "Wealth Management While Dealing with Memory Loss," Journal of Family and Economic Issues, Springer, vol. 40(3), pages 470-485, September.
    8. Michael S. Finke & John S. Howe & Sandra J. Huston, 2017. "Old Age and the Decline in Financial Literacy," Management Science, INFORMS, vol. 63(1), pages 213-230, January.
    9. Gorman, Emma, 2017. "Schooling, occupation and cognitive function: Evidence from compulsory schooling laws," SocArXiv t647a, Center for Open Science.
    10. Madelaine L’Esperance, 2020. "Does Responsibility for Financial Tasks Influence Credit Knowledge and Behavior?: Evidence from a Panel of US Couples," Journal of Family and Economic Issues, Springer, vol. 41(2), pages 377-387, June.
    11. HanNa Lim & Su Hyun Shin & Melissa J. Wilmarth & Narang Park, 2022. "Who Decides? Financial Decision-Making Among Older Couples," Journal of Family and Economic Issues, Springer, vol. 43(2), pages 310-337, June.
    12. Johnston, David W. & Kassenboehmer, Sonja C. & Shields, Michael A., 2016. "Financial decision-making in the household: Exploring the importance of survey respondent, health, cognitive ability and personality," Journal of Economic Behavior & Organization, Elsevier, vol. 132(PA), pages 42-61.
    13. Padmaja Ayyagari & David Frisvold, 2015. "The Impact of Social Security Income on Cognitive Function at Older Ages," NBER Working Papers 21484, National Bureau of Economic Research, Inc.

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