Abstract and Introduction
Abstract
Financial planning decisionss are fundamentally affective in nature; they are decisions related to money, longevity and quality of life. Over the next several decades people will be increasingly responsible for managing their own assets and investments, and they will be subject to the affective influences on active, personal decision-making. Many of these crucial decisions are made and revised across the lifespan, including when to buy or sell a home, how to save for childrens' education, how to manage healthcare costs, when to retire, how much to save for retirement and how to allocate retirement funds. As average life expectancy increases, many retirees will be faced with inadequate savings to live comfortably until the end of their lives. In the current article, we examine the problems of and potential solutions to inadequate financial planning through the lens of affective science, with an emphasis on how brain-based changes in affective processing with age might contribute to the challenge of financial planning.
Introduction
The first wave of Baby Boomers is reaching retirement age just as their investment portfolios have been drastically impacted by the latest economic crisis. A very large number of older adults must decide whether to retire as planned but with perhaps inadequate income, or to continue working for a few more years to rebuild their nest eggs as best they can. Regardless of their retirement plans, all adults with investments must decide whether and how to re-allocate their contributions as they age. An increasing number of people now must navigate the increasingly complicated and uncertain world of individual finance. They must make momentous decisions that have serious implications for themselves, their children and other family members, and for any organization or institution that relies upon their contributions. These crucial decisions are made under conditions of fluctuating risk and great uncertainty.
Under conditions of uncertainty, people largely rely upon heuristics to make decisions (e.g. Tversky and Kahneman, 1974) and in such situations often default to using affect to guide them (e.g. Forgas, 1995; Schwarz, 2000; Weber and Johnson, 2009). 'Affect' refers to the mental counterpart of internal bodily sensations associated with changes in homeostasis; it is typically described as a hedonic state varying in arousal (Russell, 2003; Bliss-Moreau and Barrett, 2009). Immediate affective responses can improve financial decisions where the consequences are immediate (Seo and Barrett, 2007) and can even overcome frame effects in decision-making (Seo et al., 2010. How affect influences complex financial decisions with changing outcomes over the long term is a pressing question. In this article, we suggest that the propensity to use affect to guide financial decision making might become even more marked as people age. Using research in affective science, we discuss some of the challenges faced by people deciding how best to manage their personal finances. In addition, although affect influences decision making for everyone (e.g. Forgas, 1995), age-related changes in affective processing might be especially likely to contribute to less than optimal decision making in older adults. The research strongly suggests that individual financial decision making in older adults might not be as rational and forward-looking as it needs to be.
We begin by characterizing the problem of ever-increasing individual responsibility for financial management. A particularly salient example of this trend is the de-institutionalization of retirement. We then address the manner in which age-related changes in affective processing can influence the quality of financial decisions, especially for American workers now approaching traditional retirement age. In particular, we discuss how older adults may be less able to draw upon detailed past experience to accurately forecast their own financial futures, leading them to rely more heavily on momentary experience when making such decisions. Because older individuals quickly regulate away negative feelings, and they might have reduced access to 'gut feelings' in the first place, they might project a blurry, but bright, financial future. Throughout the article, we pay particular attention to age-related changes in affective brain regions and circuitry; these changes can have a considerable influence on how people experience affect during decision-making and how people recruit affect to make choices (i.e. to choose the option that 'feels right'). Based on these findings, we present suggestions at individual, cultural and policy levels.