The Neurology of Financial Decision-Making

The following is a guest blog post by Natalie L. Denberg, PhD.  This post is part of SIFMA’s “Protecting Senior Investors” blog series, raising awareness and sharing information to help prevent elder financial exploitation. See our full series here

Conventional wisdom holds that aging is more or less synonymous with memory loss. So, it may surprise you that this post, written by a neuropsychologist about financial decision-making in older adults, does not include the term “memory” in its title.

One in five Americans aged 65 or older have been victimized by financial fraud, and yet the segment of the population with memory-related impairments, known as dementia, is only a fraction of this. How does a seasoned, articulate and educated professional without a diagnosis of dementia become convinced they won a foreign lottery they never entered? Or that they’ve inherited millions from a mysterious relative?

At our outset, let’s define the terms we use in the title “Neurology of Financial Decision-Making in Older Adults”:

  • “Neurology” refers to systems-level brain networks that work together to subserve the complex process of decision-making.
  • “Decision-making” means value-based, complex decisions often involving emotional and social components.
  • “Older adults” are healthy persons, aged 60 and older, living in the community and making independent decisions for themselves in everyday life.

Although memory does tend to decline with age, many older people experience far more dramatic declines in non-memory-related cognitive abilities, such as difficulties with concentration, problem solving, and decision-making. Unlike memory, which is strongly linked to the medial temporal region of the brain, these other abilities (referred to as “executive functions”) are closely linked to the frontal lobes.

Work from my laboratory and others have provided key data that supports a shift in our commonly held belief that aging means having a bad memory (clinically, “age-associated memory impairment”) to an understanding that aging results in decision-making challenges and an increased susceptibility to fraud (“age-associated executive dysfunction”) (Denburg & Hedgcock, 2015).

We have proposed that the vulnerability of faulty real-world decision-making among older adults is caused, at least in part, by a specific neurobehavioral change: the prefrontal cortex of their brain is deteriorating and thereby affecting cognitive abilities referable to this brain region. New functional neuroimaging findings, along with results from behavioral, psychophysiological and structural imaging studies of the brain, indicate that older adults may be losing their ability to make complex choices that require effective emotional processing to analyze short-term and long-term considerations. These individuals may fall prey to the promise of an immediate reward or a simple solution to a complicated problem. They may fail to detect the longer-range adverse consequences of their actions. They may assume long-term benefits in situations where there are none. We see these characteristics as direct consequences of neurological dysfunction in systems that are critical for bringing emotion-related signals to bear on decision-making. These findings suggest that abnormalities in brain areas involved in emotion and decision-making – rather than areas involved in memory – may make some older adults especially susceptible to poor decision-making. These findings are also notable because they suggest that healthy older adults who make poor decisions are not “demented,” but rather display relatively localized abnormalities in prefrontal brain regions.

In my clinical work, I often hear stories from my elderly patients and their families about how they had made poor financial decisions, were swindled, and the like. Similar alarming stories have peppered news headlines and congressional hearings in recent years. My research program has incorporated a strong translation bent, catalyzed by my work as a clinician in the University of Iowa’s Department of Neurology. To make the translation from laboratory to the real world, I have taken great pains to create decision-making stimuli that have strong external validity. I have also been involved in the creation of public policy to protect older adults. Recently, our empirical data was used to support legislation in the State of California involving a reverse mortgage bill to protect seniors (Assembly Bill 1700, Medina, Denburg, Cole, & Garcia, 2014, Reverse Mortgage Consumer Protection Bill), which implemented a science-backed change to the pre-existing reverse mortgage disclosure process in California. It is my hope that this state legislation can serve as a template for federal legislation in the near future.

Complex decision-making, such as purchasing financial products and making related decisions, is often the first cognitive function to decline in older adults, and so the financial industry is in a unique position to make a real difference in identifying and preventing elder financial abuse. Collaboration between academia and the industry is critically important to promote an understanding of the needs of our aging investors. I look forward to discussing more about my research program at SIFMA’s Senior Investors Forum on October 13.

Natalie L. Denburg, PhD
Associate Professor of Neurology and Neuroscience
University of Iowa Carver College of Medicine

Natalie L. Denburg, PhD, is the keynote speaker at SIFMA’s Senior Investors Forum: Serving the Needs of Our Aging Investors. Professor Denburg will discuss senior investors’ vulnerability to fraud as she provides a clinical perspective on recent scientific advancements in understanding the aging brain and financial decision making. Join us on October 13 in NYC or by webcast and visit SIFMA’s Senior Investor Resource Center to learn more about how we can protect our aging clients.