The Grandpa Effect: Why Older Investors Risk More

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.

The fMRI part of the study found that there was a “noisier” pattern of activation in a part of the brain implicated in learning and prediction (the nucleus accumbens), which seemed to be related to the risk-seeking behavior. The older players received the feedback of seeing how their investments did, it seems, but they didn’t learn from it or use it effectively to make optimal decisions going forward.

Another recent study, which I didn’t have time to go into in the piece, found that while old and young anticipate gains in roughly the same way, older people seem to fear loss less than younger people do.

Taken together with this recent review [PDF] of the research on aging and decision making, I think it’s fair to say that the traditional view of the elderly and how they respond to risk is pretty outdated. Older investors generally do move their money (as they should) away from risky stocks and into safe bonds — but that’s more a product of accumulated wisdom, receiving good advice, or just plain common sense than it is a product of an inherent aversion to risk.

As our brains age, we grow less adept at making certain kinds of evaluations and calculation — especially when it comes to making them quickly. Luckily, this downward slope of mental sharpness is counteracted by experience and wisdom gained over a lifetime. As discussed in this earlier piece, one paper pegs a “peak age of financial reason” at around 53. The question this all leads to is whether special protections need to be put in place to protect older investors. Of course, one could also argue that younger investors are just at much at risk of making bad decisions; after all, they’re suffering from a tremendous wisdom gap. The ultimate reality, though, is that young people have a lifetime to recover from early financial mistakes. For the elderly, the last safety net is Social Security. Which, of course, isn’t a lot to live on.