Title: Aging, Financial Literacy, and Fraud
Authors: Keith Jacks Gamble1,2, Patricia Boyle2, Lei Yu2, and David Bennett2
1: Driehaus College of Business, DePaul University
2: Rush Alzheimer’s Disease Center, Rush University Medical Center
Publication: Social Science Research Network (SSRN)
Year: 2012
Focus Area: Victim Profiling, Aging, Financial Literacy
Relevance: Understanding the various risk factors associated with fraud vulnerability is essential for effective prevention efforts.
Summary: This article reports findings from a study using longitudinal data from the Rush Memory and Aging project. The researchers analyzed the impact of decreases in cognition on financial literacy, financial confidence, and self-participation in financial decisions. They also analyzed the relationship between confidence in one’s financial knowledge and vulnerability to fraud.
Key findings include:
- A decrease in cognition is a significant predictor of a decrease in financial literacy among older Americans.
- A decrease in cognition predicts a drop in self-confidence in general, but does not predict a drop in self-confidence in managing one’s own finances or in one’s financial knowledge.
- A decrease in cognition predicts increased overconfidence about one’s financial knowledge (where overconfidence means the individual answered literacy questions incorrectly but thought the answers were correct).
- Overconfidence in financial knowledge is a significant risk factor for being victimized by financial fraud.
Author Abstract: We use a unique dataset to examine the financial literacy of older Americans and its importance for their financial decision making. The aging of the population and the shift to individual retirement accounts make this topic of growing importance to individual and societal well-being. First, we test how cognitive changes associated with aging impact financial literacy. We find that a decrease in cognition is associated with a decrease in financial literacy. A decrease in cognition also predicts a drop in self-confidence in general, but importantly, it does not predict a decrease in confidence in managing one’s own finances or in one’s financial knowledge. In fact, a decrease in cognition predicts increased overconfidence about one’s financial knowledge. Second, we test the hypothesis that overconfidence is a significant risk factor for being victimized by financial fraud. Financial fraud is a major threat to older Americans that is growing rapidly. We find that overconfidence in one’s financial knowledge is a significant predictor. A one standard deviation increase in overconfidence increases the odds of falling victim to fraud by 38%. The overconfidence of fraud victims is further demonstrated by their increased propensity to hold a concentrated investment. Our results suggest that increasing the financial awareness of older Americans is likely to help protect them against becoming victims of financial fraud.
