NEW YORK (MainStreet) -- This is not the news anybody wants to start their trading day with. But, there is solid evidence that indicates that the irrational markets we all struggle with these days may have a tragically human cause:
Traders are getting older. And they are making poorer financial choices.
"When you look at those who make questionable financial decisions, either via fraud or with simple bad judgement, advanced age is a startlingly common factor," Ted Beck explained to me over coffee last week.
Beck is president of the National Endowment for Financial Education, the Denver, Colo., think tank that promotes financial literacy. Beck's organization has looked at the effects of aging on financial decision-making before. A 2012 study it commissioned, called Diminished Capacity and Financial Decision Making, is chock full of sobering numbers on what happens when age affects investor acumen.
The study estimates that a full 12% of the population admitted to having diminished financial capacity. With about half of them claiming they struggle paying bills and managing finances; and roughly a third being unsure if they can manage simple math.
Beck says diminished cognitive ability in financial decision-making will become big news this summer. His organization is rolling out two major studies from Columbia University and the University of Alabama. And he says this scholarship will indicate that as the general population ages, diminished cognitive power will no longer be limited to just personal financial decision-making.
It will become a real factor on how a stock gets bought, sold and priced.
"The full scope will be revealed when we publish the studies," he said. "But at least from what we are seeing now, cognitive decline has a remarkably destabilizing effect on the entire market."
Wrestling with Cognitive Decline
A quick look through the most heavily cited papers on cognitive decline in financial literacy show what worries Beck. The 2007 Journal of Gerontology paper, Assessment of Decision-Making in Older Adults -- An Emerging Area of Practice and Research by Jennifer Moye and Daniel C. Moreson, points out that the convergence of aging and the enormous transfer of intergenerational wealth has "greatly expanded the incidence and importance for the capacity assessment in adults."
And a 2011 study, sponsored by The AARP, Protecting Older Investors, The Challenge of Diminished Capacity made it clear that the risks of an aging population making financial decisions was on the rise. "Cognitively impaired investors are at risk for financial exploitation," the report flatly summarized.