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Self-assessed cognitive ability and financial wealth: Are people aware of their cognitive decline?

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Mazzonna F., Peracchi F.
Working paper
We investigate whether people correctly perceive their own cognitive decline and the potential financial consequences of misperception. Using longitudinal data from the Health and Retirement Survey, we examine the relationship between self-ratings of memory ability and assessed memory performance and show that older people tend to underestimate their own cognitive decline. We then investigate the financial consequences of this underestimation. We show that respondents who experience a severe cognitive decline across waves, but are unaware of it, are more likely to experience financial losses. Finally, we examine potential explanations for the patterns of wealth changes observed among respondents who are unaware of their cognitive decline. Our findings support the view that financial losses among unaware respondents reflect bad financial decisions, not rational disinvestment strategies.