Why is Grandpa betting his retirement on black?

Back in June, we covered the surprising phenomenon in which older investors tend to take greater risks than younger ones. Because it is so peculiar, we are revisiting the topic (and digging deeper) as part of our look at how our brains work when it comes to finances.

Young people are often stereotyped as loose with their money, but a recent study shows that the elderly might be riskier spenders. Older folks made fewer optimal choices on a financial investment task than did their younger counterparts, tending to choose a risky stock in situations where a bond would be smarter. In this task, the “rational, risk-neutral” investor will pick a stock if he or she expects the dividend to at least equal the bond earnings. There is a “good” stock (high probability of gain), a “bad” stock (high probability of loss), and a bond for every trial of the task. Choosing a risky stock when the bond is the best bet for a particular scenario is considered a risk-seeking choice, and it turned out that older participants made more of these choices. In fact, the older a person was, the more likely he or she was to pick a risky stock when it wasn’t the best time to do so. Eighty-year-olds were riskier than seventy-year-olds, who were riskier than sixty-year-olds. Surprisingly to some, the twenty-somethings were the most prudent in their financial decisions. Older and younger people did not differ on mistakes related to risk-avoidance (i.e. when they were over-cautious and chose the bond instead of a good stock), only on the risky side of things.

This risk-seeking behavior was linked with fMRI variability in a structure of the brain called the nucleus accumbens, which is involved in recognizing and pursuing rewards. It is possible that functioning of this structure (or some pathway involving this structure) worsens with age, making us more likely to jump at a hot stock when we really shouldn’t. Other research supports the notion that our brains vary more in functioning as we age, and that the neurotransmitter dopamine has something to do with financial daring in our golden years.

So, if you have older parents, perhaps it’s time to have a chat with them and see if they are invested appropriately for their age.  Or, refer them to Community Ladders and let us have that awkward conversation!

Reference:  Samanez-Larken, 2010, in Journal of Neuroscience, Vol 30, No 4.

Joe Grammer works in a suicide prevention research lab at the National Naval Medical Base. At Community Ladders, he writes about psychology and how it relates to finance and consumer choices.