Older Investors Risk More

Grandpa Factor: Older Investors Risk More
Ryan Sager / SmartMoney (US)

The young are fearless and bold. The old are scared and cautious. That’s the conventional view of how we feel about risk over the course of a lifetime. We start out brash — ready to bet it all on a long shot. But as we age, we need to hoard our resources and make sure we’ve provided for the slow shuffle into frailness and vulnerability.

New research in behavioral economics and neuroscience, however, is complicating this simple picture. Part of aging is an inevitable decline in our cognitive function. And part of that decline is a change in how our brains respond to risk. But that change isn’t necessarily to become more fearful of risk; in fact, it may be just the opposite.

A new study in the latest issue of the Journal of Neuroscience sheds some light on the subject. A team composed of researchers from the department of psychology at Stanford University and the Kellogg School of Management at Northwestern University looked at a group of 110 healthy volunteers, ranging in age from 19 to 85, as they played a simple investment game — half of them doing so inside a functional magnetic resonance imaging (fMRI) brain scanner. What the researchers found was that, contrary to stereotypes about the elderly, it was older participants in the study who made more mistakes on the task when it came to choosing too many risky assets.

Here’s how the experiment worked. All the subjects played an investment game where they could choose between three assets: a bond with a definite payoff of $1, one stock twice as likely to pay off $10 as to lose $10 dollars (the “good” stock), and another stock with those odds flipped (the “bad” stock). Participants weren’t told which stock was the good stock and which stock was the bad stock, but they could figure out which was which by paying attention over the course of 10 trials.
And here’s what they found. Mistakes in the game — choices that deviated from what a fictional, perfectly rational actor would have made — increased with age. This was to be expected given that we expect cognitive function to decline with age. What was revealing, however, was precisely what kinds of mistakes increased with age.

One type of error a player could make was a “confusion” mistake. That is choosing Stock A over the bond late in the game when it should have been clear that Stock B was the good stock. Confusion mistakes did increase with age, but they were still very rare; they made up only 8% of mistakes among the oldest third of players (ages 67-85) and 3% of mistakes among the youngest third (ages 19-35).

Where the mistakes really increased among the elderly were with what the researchers term “risk-seeking” mistakes. That is choosing the stocks over the bond early in the game when it’s not clear yet which stock is paying off and which stock is losing money. These made up 32% of all mistakes in the oldest age group compared to 24% in the youngest.
A third type of mistake, “risk aversion,” occurred when a player chose the safe but paltry bond when it should have been clear the stock was the better option. Despite the stereotype that older people are more risk averse, this type of mistake was made with roughly the same frequency by all age groups.

What exactly made the elderly players more likely to seek risk? From the fMRI data, the researchers found that a “noisier” pattern of activation in a part of the brain implicated in learning and prediction, the nucleus accumbens, seemed to be related to the risk-seeking behavior. The older players received the feedback of seeing how their investments did, but they didn’t learn from it and use it effectively to make optimal decisions going forward.

Clearly, the image of the elderly as risk averse needs some revision. Aside from the experimental evidence, we also know that gambling is extremely popular among the elderly. More worrying, a 2002 survey by AARP found that healthy older investors continue to invest in risky assets even after suffering losses in the stock market large enough to necessitate postponing retirement.

It’s not all bad news, though: The aging process isn’t all one big downhill slide. The decline in our ability to make rapid judgments and predictions about value is counteracted by a degree of gained wisdom and experience. Research has found an age of peak financial decision making around 53. And, luckily, real financial decisions don’t take place within a few seconds lying in a cramped scanner — giving us time to hit the brakes and seek out reliable information about the true risks of our options.

Knowing that it’s our ability to evaluate risk, not our boldness, that we lose with age may give us the wisdom to hit the brakes just a little harder as the years go by.