Don’t miss the latest developments in business and finance.

Decline in cognitive ability leads to fear of upfront costs

Image
IANS New York
Last Updated : Dec 03 2015 | 2:22 PM IST

As this generation continues to age, dialogue will increase on how to manage concerns associated with ageing, such as the decline in cognitive ability and retirement decisions, researchers aver.

A recent study at University of Missouri found that older individuals with lower cognitive abilities are susceptible to behavioural biases, such as being adverse to upfront costs.

The risk of aversion, along with lower cognitive ability among older Americans, might explain the lack of demand for certain retirement savings products, said Michael Guillemette, assistant professor.

"With a pure-life annuity, an individual will pay an upfront cost that is typically $50,000 or higher and in exchange will receive monthly payments for life."

"The risk associated with annuities comes from the uncertainty of death. If the full amount of the annuity is not paid out prior to the death of the recipient, the money is lost," Guillemette added.

The analysis considered two hypothetical risky financial prospects, both with equivalent expected returns, one situation included an upfront cost and the other had no upfront cost.

More From This Section

The results showed that individuals with lower cognitive ability exposed to the perceived upfront cost were less willing to take subsequent risk.

The results might explain why companies choose to break up upfront costs in order to increase sales. For example, a large phone company now has a programme where you pay for the full cost of the phone over several years.

Annuities can play an important role for older Americans. Serving as a type of insurance, annuities can help protect people from running out of money before death.

The industry could improve the demand for annuities by breaking the large upfront cost into incremental payments over time, Guillemette stated.

The researchers also say that financial advisors often describe annuity products as investments, but they might be more appropriately framed as insurance products that protect against loss.

"A Certified Financial Planner who is a fiduciary could be beneficial because he/she could recognise those cognitive shortfalls and work in the individual's best interest in terms of proper financial decisions," Guillemette advised.

Also Read

First Published: Dec 03 2015 | 2:08 PM IST

Next Story