Does Financial Savvy Peak at 53?


The Wall Street Journal recently published a column in which author David Wessel highlighted some research suggesting that people's financial savvy peaked around age 53. The abstract reads:

" The sophistication of financial decisions varies with age: middle-aged adults borrow at lower interest rates and pay fewer fees compared to both younger and older adults. We document this pattern in ten financial markets. The measured effects can not be explained by observed risk characteristics. The sophistication of financial choices peaks at about age 53 in our cross-sectional data. Our results are consistent with the hypothesis that financial sophistication rises and then falls with age, although the patterns that we observe represent a mix of age effects and cohort effects."

It is interesting research, and the researchers – who hail from Harvard, MIT, and the Federal Reserve – are no lightweights. The curve of sophistication in making choices to optimize things like home equity interest rates and credit card fees do show highly correlating curves peaking around age 53. The conclusion that this "age of reason" (as the authors call it) is the point where the declining line of raw cognitive ability crosses with the rising line of experiential ability is an enticing one, but there is a small problem. As I've written about in Statistics Show Ice Cream Causes Murder, correlation has nothing to do with cause and effect. There are a number of alternative explanations, and the authors hint at one: since this is a snapshot-in-time of data from 2002, it could reflect the unique capabilities/characteristics of the current age groups (e.g., Baby Boomers).

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As I read the article, another explanation immediately jumped to mind: focus. People in their 20's figure they have plenty of time to get their financial house in order and so focus their greatest energy in other areas. Likewise, people in their 60's and beyond have probably set themselves up, seen their children leave the nest, and are now focused on either leaving a legacy or enjoying the empty nest. They've got bigger concerns than reading the fine print on their credit card offers. But at 53, the pressures to plan for the future and meet current obligations such as paying for college and retiring that mortgage are probably at their greatest. In the WSJ forum on the article, assistant managing editor of the WSJ expresses this thought more eloquently:

"Okay, here's my personal theory; 53 is the age of maximum financial anxiety.

Before then, you have endless optimism about the ability of your financial prospects to expand. After then, your obligations begin to contract. But at that moment, when you find it hard to imagine how the two lines will ever cross, you count every last [expletive] penny.

I admit my data set is limited, but…….."

What do you think?

[Note: article contains link to the paper itself]

  • Steve

    Well, it looks like Buffett and Munger have way over stayed their usefulness.