As We Age, We Get Both Smarter and Less Smart

The bad news: our brains slow down as we age. As early as our 30s, "fluid intelligence" starts deteriorating.

The good news: another type of smarts—"crystallized intelligence," or the ability to use skills, knowledge, and experience—keeps growing until we get elderly.

During a recent Public Affairs Forum at the Atlanta Fed's headquarters, Columbia University Business School Professor Eric Johnson explained how fluid intelligence and crystallized intelligence affect people's financial decision making.

Generally speaking, Johnson explained, crystallized intelligence—the stuff we learn over time, like what an insurance policy deductible is—is more important to making financial choices than is fluid intelligence—the ability to do things like quickly solve visual puzzles.

U.S. and world populations graying
This subject is critical. The aging of the world and U.S. populations has major implications for public policy and individuals’ finances, Johnson noted. Worldwide, the number of people over 65 will double by 2035, he said. In America, 20 percent of the population will be over 65 by 2030, compared to 14 percent in 2013.

As fluid intelligence weakens, crystallized intelligence—our personal database—expands and helps to compensate, explained Johnson, who is affiliated with the Columbia Business School's Center for Decision Sciences and the Consumer Financial Protection Bureau. Declining fluid intelligence makes it harder for older people to understand complex financial products, and thus makes them frequent targets for fraud, Johnson pointed out.

But when it comes to handling money, crystallized intelligence makes a big difference.

"Older people are better decision makers," Johnson said.

To illustrate the point, he cited the example of a college graduate, "Ann," who earns $50,000 a year and has average cognitive ability. His research shows that if you increase Ann's fluid intelligence and crystallized intelligence the same amount, the extra crystallized intelligence results in a much bigger jump in her credit score. A higher credit score could mean a lower mortgage rate, which in turn would save Ann a great deal of money over the life of her loan.

Along with individuals, public policymakers will face repercussions from the intersection of intelligence, aging, and financial decision making, Johnson said. Notably, declining cognitive ability in old age can affect the way people spend their savings as they retire, he observed. Governments, Johnson said, need to incentivize financial services firms to create suitable products to help people "deccumulate" wisely.

The Public Affairs Forums feature noted speakers who offer insightful economic perspectives on emerging public policy issues that affect the U.S. and regional economies. This year, the Atlanta Fed will hold half a dozen forums throughout the District.