The capacity to make decisions—including financial ones—changes dramatically over the life cycle. The young may enjoy greater cognitive abilities (innate mental processing skills peak at around age 20, akin to peak physical performance) but the old have more experience to bring to bear on practical matters. People age 50 or older—in other words, the bulk of your clients—also have a different outlook on life: They are happier, according to most psychological research, and their sunny outlook influences their financial decisions.

Research into how the elderly make decisions is one of the hottest areas of behavioral finance right now. The conclusions are often counterintuitive and even unsettling. The aging brain puts even the most detail-oriented, accomplished seniors at ease with impulsive moves and therefore leaves them vulnerable to scams as well as plain old poor decisions. Everything will work out, they tell themselves—they got this far, didn't they? Therefore, it behooves advisors to familiarize themselves with these very new findings from neuroscientists and other researchers in order to help their elderly clients.

What is the defining characteristic of the elderly client? "Vulnerability," says Nicole Maestas, an economist at the Rand Corporation, the Santa Monica, Calif.-based think tank. "A 40-year-old could easily have problems handling complex financial decisions, but the problems are much worse in a 65-year-old, and the difference is clearly age-related," she says. We are not talking about Alzheimer's or dementia here, but about fully functioning individuals. Maestas studied people's ability to navigate the Medigap insurance market. These plans are highly standardized, and yet people pay wildly different prices. Maestas calls the disparity "puzzling." According to standard economics, people should buy the lowest cost product, she says, but that wasn't the case.

Why not? According to Maestas, the decision is so complex that people turn to insurance agents for help, and whether the advice is bad or good, they take it. The price variation "shows the vulnerability of the elderly when facing agents" as well as their inability to determine the lowest-cost policy on their own. Medigap purchasers tend to be the affluent and well educated, yet even these consumers are making poor decisions and are vulnerable to their agents' sales pitches, Maestas adds.

At the same time, as Maestas points out, "there is heterogeneity in the pace of the decline." Not all the elderly are equally marked by diminished decision-making ability, with the highly educated tending to be more resilient. Nonetheless, in general, the old are different.

THINKING POSITIVE
Though the elderly are often described as irritable, hence with the movie Grumpy Old Men, the opposite is more typical. The old are in fact more positive than the young. "Dozens and dozens of studies show that as people age they become less interested in negativity and more interested in the positive," explains Lisa Feldman Barrett, a neuroscientist at Boston College.

Why the elderly are so positive is subject to debate. It could simply be emotional maturity: Why sweat the small stuff? Life's too short.

Barrett's research and that of most behavioral finance academics is focused on changes in the brain. Over a lifetime the brain shows a decreased responsiveness to negative stimuli.

The change is seen most obviously in the amygdala, a brain structure in the temporal lobe that appears to play a key role in emotional processing as well as in regulating attention and memory. The amygdala of an elderly person, according to Barrett, doesn't respond as strongly to negative stimuli as the brains of the young. "It gets less sensitive to negative stimuli over the life cycle," she says.

The "positivity effect" of divesting yourself of what is negative is found across numerous domains as people age. Positivity is found in both the memories of the elderly and their forecasts of likely events. They are less likely to remember details of negative incidents, and more likely to predict a positive, albeit vague and undetailed future. "Older people don't imagine the future very well," Barrett says. "They can do the general gist, but they can't fill in all the details."

The question is, What does positivity mean to your clients' finances? "A lot," Barrett says. In a forthcoming paper entitled An Affective Science Perspective on Age-Related Challenges in Financial Decision Making, Barrett and her co-authors from the Boston College Center for Retirement Research conclude that "increased attention to positive information is a recipe for optimistic, but not necessarily realistic, financial planning." This compounds the challenges of anticipating the daily reality of the future, such as the retirement years.