Senior investors aren’t just more vulnerable to industry misconduct. They can also be a danger to themselves due to overconfidence in their investment skill, suggests new research from the FINRA Investor Education Foundation. (FINRA is the Financial Industry Regulatory Authority, the U.S. self-regulatory organization.)
FINRA’s investor education arm published a paper that finds overconfidence among senior investors can contribute to risky investing behaviour.
The study from the FINRA Foundation, along with researchers from Duke University and Rush University Medical Center, is based on a survey of 1,200 investors between ages 58 and 101 about financial literacy, confidence in financial knowledge and decision-making.
The researchers found that financial literacy was lowest among the oldest participants in the study, and that the most overconfident respondents were also more likely to take financial risks.
The relationship between overconfidence and risk tolerance was found in respondents both with and without mild cognitive impairment.
“Financial literacy levels among all Americans are alarmingly low, but among older investors, our research suggests that the challenges are even greater,” said Gerri Walsh, president of the FINRA Foundation. “This is because financial knowledge declines at older ages, but confidence in financial knowledge does not, and the resulting overconfidence can lead to unfortunate financial consequences.”
“Senior investors manage a large share of our nation’s wealth, and risky decisions by aging investors can result in the loss or diminution of a lifetime of personal savings,” Walsh added.
Given the disparity between senior investors’ financial literacy and their confidence, FINRA said that aligning their actual financial literacy levels with their confidence may help protect cocky seniors from overly risky investments.