More Erratic Tactics, But Just as Profitable
Jameson Berkow / Financial Post (Canada)
Despite our stereotyped notions of the predictable elderly investor, new research suggests certain regions of the brain make for increasingly irrational decisions as investors age.
The research was published in the Journal of Neuroscience in January 2010 and a follow-up study is set to be published next month in Social Cognitive and Affective Neuroscience. It was based on brain scans of about 54 people aged 20 to 85.
"We were really interested to see if the older adults [over 65] would really prefer to avoid the riskier [investments], because that is what the stereotypes would suggest," said Gregory Samanez-Larkin, a post-doctoral researcher at Vanderbilt University, co-director of the Scientific Research Network on Decision Neuroscience and Aging sponsored by the National Institute on Aging and one of the study's authors. "But we didn't find that at all."
Participants were asked to make a series of investment decisions while researchers monitored activity in a certain part of the brain called the nucleus accumbens. Parts of the accumbens become more active when people make high-risk financial decisions while other parts are stimulated when making decisions of comparably low risk.
Risk aversion actually varied uniformly across all age groups. However, when comparing the series of decisions made by participants under 65 with those older, the researchers found elderly participants made increasingly erratic decisions as the process evolved.
The assumption was that as participants moved forward, the knowledge gained from previous decisions would influence decisions made later, allowing researchers to build a predictive model based on which part of the nucleus accumbens was more active. While the decisions made by younger participants generally followed mathematical models of choice, the accumbens of those brains aged 65 or older proved far too "noisy," or overactive, for the researchers to map out their decisions along any known scientific model.
Yet even though participants over 65 made investment decisions that increasingly baffled the researchers, they ended up no worse off than their younger counterparts.
"The older adults still made the same amount of money as the younger adults, but they're just doing something different," Dr. Samanez-Larkin said. "They aren't doing this risk-neutral rational actor kind of [decision-making]; there is something about their strategy that is different than the younger adults and we really don't have a good sense of what they are doing differently."
"But I don't think the conclusion should be that older people make bad decisions because they made just as much money," he said. "It is just their responses are more inconsistent relative to the models that we have available."
Colin Cieszynski, market analyst with CMC Markets, was not surprised by that conclusion. While he has never seen hard data to support it, he has seen plenty of anecdotal evidence over the years to support the study's findings.
"One thing I've seen in my experience is that sometimes people, when they are getting closer to retirement and are behind on their savings, sometimes they will move from bonds to stocks to try and catch up a little bit," Mr. Cieszynski said. "Especially in this kind of environment where long-term buy-and-hold strategies haven't made a lot of money in the last five or 10 years, you've been up and down but the markets have ended up pretty much sideways."
"I mean, you might go to penny mining stocks but you might go to dividend-paying equities," he said.