The capacity to make decisions, including financial decisions, changes dramatically over the life cycle. The young may enjoy greater cognitive abilities-innate mental processing skills peak at around age 20, akin to peak physical performance-but the old have more experience to bring to bear on practical matters. People age 50 or older-in other words, the bulk of your clients-also have a different outlook on life, characterized by a different mood, from the young. They are happier, according to most psychological research, and their sunny outlook influences their financial decisions.

Research into how the elderly make decisions is one of the hottest areas of behavioral finance right now. The conclusions are often counterintuitive and even unsettling. The aging brain puts even the most detail-oriented, accomplished seniors at ease with impulsive moves and therefore leaves them vulnerable to scams as well as plain old poor decisions. Everything will work out, they tell themselves-they're here, aren't they? Therefore, it behooves financial planners to familiarize themselves with these very new findings from neuroscientists and other researchers in order to help their elderly clients.

What is the defining characteristic of the elderly client? "Vulnerability," says Nicole Maestas, an economist at the Rand Corporation, the Santa Monica, Calif.-based think tank. "A 40-year-old could easily have problems handling complex financial decisions, but the problems are much worse in a 65-year-old, and the difference is clearly age-related," she says. We are not talking about Alzheimer's or dementia here, but about fully functioning individuals. Maestas studied people's ability to navigate the Medigap insurance market. These plans are highly standardized, and yet people pay wildly different prices. Maestas calls the disparity "puzzling." According to standard economics, people should buy the lowest cost product, she says, but that wasn't the case.

Why not? According to Maestas, the decision is so complex that people turn to insurance agents for help-and whether the advice is bad or good, they take it. The price variation "shows the vulnerability of the elderly when facing agents" as well as their inability to determine the lowest-cost policy on their own. Medigap purchasers tend to be the affluent and well educated, yet even these consumers are making poor decisions and are vulnerable to their agents' sales pitches, Maestas adds.

At the same time, as Maestas points out, "there is heterogeneity in the pace of the decline." Not all the elderly are equally marked by diminished decision-making ability, with the highly educated tending to be more resilient. Nonetheless, in general, the old are different.

THE POSITIVITY EFFECT

Though the elderly are often described as irritable, like in the title of the classic movie, "Grumpy Old Men," the opposite is more typical. The old are in fact more positive than the young. "Dozens and dozens of studies show that as people age they become less interested in negativity and more interested in the positive," explains Lisa Feldman Barrett, a neuroscientist at Boston College.

The "positivity effect" of divesting yourself of what is negative and not rewarding as you age, is found across numerous domains. Take social life: When you are young, you can put up with a lot, including difficult but interesting friends. But when you reach middle age, according to Barrett, you are likely to drop high-maintenance friends and difficult people. Over time, your social network shrinks but you actually derive more pleasure from socializing.

This search for positives and avoidance of negatives can be traced all the way to how people use their vision at different ages. In a 2006 experiment, Derek Isaacowitz of Brandeis University's Emotion Lab showed emotion-evoking images-a smiling baby and an accident scene-to individuals in their seventies and in their teens, and then measured the duration of their gazes down to the millisecond. Seniors, much more than teenagers, gravitated toward the positive image. The difference in gazes averaged a full two seconds. This experiment has been replicated countless times, with the elderly consistently spending more time gazing at positive images compared with the young. As for avoiding negative images, again the differences are large, over two seconds.

THINK HAPPY THOUGHTS

Positivity is found in both the memories of the elderly and their forecasts of likely events. They are less likely to remember details of negative incidents, and more likely to predict a positive, albeit vague and undetailed future. "Older people don't imagine the future very well," Barrett says. "They can do the general gist, but they can't fill in all the details." For example, she says, healthy 60-year-olds, asked to forecast a typical day in retirement, tend to have a rosy view, heavily influenced by the present: "They don't anticipate their health will change, or the loneliness," Barrett says.