How to Protect An Aging Mind From Financial Fraud

Although aging is inevitable, financial fraud in old age isn’t. Elderly individuals in the US alone lose an estimated 3 billion dollars a year to financial scams. Our research offers insights into how we can prevent this troubling reality.

The simple use of the language ‘grandma scam’ or ‘grandparent scam’ attests to the fact that elder financial abuse has become normalized, even unsurprising, in our increasingly digital world.

Older populations are not more susceptible to financial fraud simply because of naivité or their limited technological literacy. More accurately, older populations are victims of cognitive decline far before they are victims of financial scams.

Financial decisions are already some of the most stressful we make. These complex decisions become increasingly difficult to navigate as we age. Our research team wanted to understand: why do older adults tend to be more susceptible to fraudulent situations and how can we prevent this phenomenon?

Step 1: Why are older populations more susceptible to financial fraud?

The behavioral science literature offers some key insights into why we become more susceptible to financial fraud as we age.

  1. Older adults tend to rely more on system 1 thinking That is, fast, automatic and unconscious – and less on System 2 – which leverages fluid intelligence to reason and think through problems deliberately (Peters et al., 2000). Our crystallized intelligence (which comes with knowledge and experience) does increase with age, which compensates for decreases in fluid intelligence. However, crystallized intelligence starts to decline around 70, which leading to an overall reduction in decision-making quality in the later years (Tymula et al., 2013).
  2. Older adults are more affected by choice overload They find it more difficult to navigate a proliferation of choice and may lead them to suboptimal decision-making when overwhelmed. Specifically, they find it more challenging to ignore and sift through irrelevant information when placed in a situation to do so (Besedeš et al., 2010).
  3. Older adults have reduced numeracy and are less apt at assessing risk Cognitive decline is closely associated with increased difficulty in using reason when evaluating numbers (e.g. about a 1% vs 0.1% risk) (Best & Charness, 2015).

Step 2: How can we alter the decision-making environment to reverse the cognitive effects of aging?

The behavioral science literature suggests that one of the reasons that older populations may be more susceptible within financial decision-making environments is because they are prone to paying close attention to details in the present while ignoring the bigger picture, a phenomenon that is also known as low-level construal’. This predisposition to think about details in the present (see the availability heuristic and salience bias) can increase vulnerability in financial decision-making environments. This is particularly troubling when many fraudulent emails leverage the urgency to ‘act now’. For example, a foreign lottery scam including the message: “Send a deposit of $200 within the next 24 hours to claim your lottery earnings”, brings the present front and center. Biases towards present actions are amplified when the consequences of certain behaviors will be felt much later into the future.

Perhaps then, prompting abstract thinking, or ‘high-level construal’ would promote critical thinking about financial decisions in older populations. Our hypothesis was that incorporating personal financial risk assessment questionnaires into investment decision-making environments would effectively promote abstract thinking, ultimately reducing financial fraud susceptibility amongst older adults (aged 60+).

Testing our hypothesis

Our experiment involved 102 North American respondents divided into equally sized younger (18-25) and older (60+) cohorts. The participants were randomly assigned to a treatment or control group. Both groups were shown an email about an investment opportunity, which incorporated many of the common red-flags of fraudulent pitches. After reviewing the email, the respondents assessed the pitch along several dimensions including appeal, willingness to invest, and perceived risk. The intervention for the treatment group was a Personal Financial Risk Assessment, which the respondents completed before viewing and assessing the email.

Fraudulent investment opportunity provided to participants in the experiment. According to the US Federal Trade Commission, financial scams are increasingly occurring online.

How a simple mind hack points to the potential of reducing susceptibility

When comparing the treatment and control groups we found a significant effect of the intervention on susceptibility scores in those aged 60 and over. The control group who did not complete the personal financial risk assessment was much more likely to consider the financial opportunity to be appealing, trustworthy, and they expressed a greater willingness to invest. Furthermore, there was no effect of the intervention on the 18-25-year-old group, suggesting the intervention specifically targeted the cognitive deficits associated with old age.


This graph reports the effects of a Personal Financial Risk Assessment intervention on susceptibility to financial scamming in 18-25-year-olds versus 60+-year-olds. This intervention was effective in reducing susceptibility (p < .05), but only in the 60+-year-old group, suggesting that it may specifically target decision deficits linked to cognitive decline.

Key Takeaways

As the world becomes increasingly digital, and populations age, financial scams may become more common. The more tools we can provide to vulnerable populations to protect themselves from “falling for it”, the fewer victims there will be to face the negative consequences.

Overall, the key things to take away from this article are the following:

  • Although people of any age can fall victim to financial fraud, older individuals are at the greatest risk due to changes in cognitive functioning.
  • Biases towards “detail-oriented” thinking vs “big-picture thinking” in older populations increase overall susceptibility to financial fraud.
  • Interventions, such as personal risk assessments which prompt “big picture thinking” encourages critical thinking, and can, in turn, reduce susceptibility to financial fraud.
  • Our findings support existing literature, which demonstrates that older adults strategically change their preferred decision modes from being deliberative to more heuristic-based in order to compensate for cognitive declines in everyday functioning (Mutter and Pliske, 1994; Yates and Patalano, 1999).

References

Best, R., & Charness, N. (2015). Age differences in the effect of framing on risky choice: A meta-analysis. Psychology and Aging, 30(3), 688–698. https://doi.org/10.1037/a0039447

Denburg, N. L., Tranel, D., & Bechara, A. (2005). The ability to decide advantageously declines prematurely in some normal older persons. Neuropsychologia, 43(7), 1099–1106. https://doi.org/10.1016/j.neuropsychologia.2004.09.012

Grable, J. E., McGill, S., & Britt, S. (2011). Risk Tolerance Estimation Bias: The Age Effect. Journal of Business & Economics Research (JBER), 7(7). https://doi.org/10.19030/jber.v7i7.2308

Kannadhasan, M. (2015). Retail investors’ financial risk tolerance and their risk-taking behaviour: The role of demographics as differentiating and classifying factors. IIMB Management Review, 27(3), 175–184. https://doi.org/10.1016/j.iimb.2015.06.004

Perez, A. M., Spence, J. S., Kiel, L. D., Venza, E. E., & Chapman, S. B. (2018). Influential Cognitive Processes on Framing Biases in Aging. Frontiers in Psychology, 9, 661. https://doi.org/10.3389/fpsyg.2018.00661

Reed, A. E., & Carstensen, L. L. (2012). The Theory Behind the Age-Related Positivity Effect. Frontiers in Psychology, 3. https://doi.org/10.3389/fpsyg.2012.00339

Roalf, D. R., Mitchell, S. H., Harbaugh, W. T., & Janowsky, J. S. (2012). Risk, Reward, and Economic Decision Making in Aging. The Journals of Gerontology: Series B, 67B(3), 289–298. https://doi.org/10.1093/geronb/gbr099

Sumit Agarwal, John C. Driscoll, Xavier Gabaix, & David Laibson. (2009). The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation. Brookings Papers on Economic Activity, 2009(2), 51–117. https://doi.org/10.1353/eca.0.0067

Weller, J. A., Levin, I. P., & Denburg, N. L. (2011). Trajectory of risky decision making for potential gains and losses from ages 5 to 85. Journal of Behavioral Decision Making, 24(4), 331–344. https://doi.org/10.1002/bdm.690

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