Finance & Accounting Marketing Feb 1, 2010

The Finan­cial Haz­ards of Aging

Why old­er adults choose riski­er investments

Based on the research of

Gregory R. Samanez-Larkin

Camelia Kuhnen

Daniel J. Yoo

Brian Knutson

Old­er Amer­i­cans forced to post­pone retire­ment because of stock mar­ket loss­es often con­tin­ue to make risky invest­ments. These deci­sions may hurt not only the indi­vid­u­als who make them but the econ­o­my as a whole.

Yet lit­tle research has tried to under­stand how the aging brain process­es these crit­i­cal invest­ment deci­sions. A new study by Camelia M. Kuh­nen (Assis­tant Pro­fes­sor of Finance at the Kel­logg School of Man­age­ment) and col­leagues Gre­go­ry R. Samanez-Larkin (doc­tor­al stu­dent at Stan­ford Uni­ver­si­ty), Daniel J. Yoo (research assis­tant at Stan­ford Uni­ver­si­ty), and Bri­an Knut­son (Asso­ciate Pro­fes­sor of Psy­chol­o­gy at Stan­ford Uni­ver­si­ty) offers some clues. Their research, pub­lished in the The Jour­nal of Neu­ro­science, finds that old­er adults tend to make mis­takes when choos­ing riski­er invest­ments because of noisy” val­ue sig­nals in their brains.

The study used brain-scan­ning equip­ment to com­pare the brains of younger adults to old­er adults as they played a fast-paced invest­ment game. Exam­in­ing the respons­es of old­er adults, Kuh­nen and col­leagues found a cor­re­la­tion between risky invest­ments and reac­tions in the brain’s reward cir­cuit­ry, specif­i­cal­ly a region in the emo­tion­al brain called the nucle­us accumbens.

We found old­er adults made more mis­takes,” Kuh­nen says. They seem unable to rep­re­sent val­ue accu­rate­ly in the nucle­us accum­bens area.”

Psy­cho­log­i­cal research from oth­er groups has shown that old­er adults dis­pro­por­tion­ate­ly antic­i­pate gains over loss­es when choos­ing risky assets, but Kuh­nen says her study was the first to iden­ti­fy the region in the brain where these age-relat­ed mis­takes like­ly occur. This lat­est study may help explain why old­er adults seem sus­cep­ti­ble to invest­ment frauds. Scam artists often demand quick deci­sions, which tap into the emo­tion­al brain. Kuh­nen says her research sug­gests that elder­ly investors will make bet­ter deci­sions when they have time to engage their ratio­nal brain and con­sid­er their choices.

When you take a long time to think, it is not clear the emo­tion­al brain will play as impor­tant a role,” she says. The results also chal­lenge the pop­u­lar notion that old­er adults are inher­ent­ly con­ser­v­a­tive investors, Kuh­nen says.

Finan­cial Games
For her study, Kuh­nen and Stan­ford col­leagues recruit­ed 92 vol­un­teers ages 19 to 85 from the San Fran­cis­co area. All sub­jects played an invest­ment game, but 54 did so while under­go­ing brain scans using func­tion­al mag­net­ic res­o­nance imag­ing (fMRI). The remain­ing 38 vol­un­teers served as behav­ioral con­trols. Vol­un­teers were shown three dif­fer­ent sym­bols that cor­re­spond­ed to three kinds of invest­ments. Par­tic­i­pants played ten rounds of the game; each round con­sist­ed of ten sep­a­rate tri­als. A cir­cle always rep­re­sent­ed a safe, low-yield bond, but before each round, a com­put­er ran­dom­ly assigned dif­fer­ent sym­bols to rep­re­sent high- or low-per­form­ing stocks. Sub­jects could learn which sym­bol was the good” stock only by play­ing the game.

Kuh­nen knew from her pre­vi­ous research that ratio­nal investors would choose bonds until they were able to iden­ti­fy the high-per­form­ing stock. Then they would invest in the good stock for a high­er return. Would the old­er investors in her exper­i­ment behave the same way? As vol­un­teers select­ed their invest­ments, Kuh­nen and col­leagues looked for three kinds of mistakes:

• Risk-seek­ing mis­takes, in which sub­jects invest­ed in stocks when bonds were the best choice (these mis­takes were made ear­ly in the game before it was pos­si­ble to iden­ti­fy the good stock)
• Con­fu­sion mis­takes, in which sub­jects invest­ed in the low-per­form­ing bad” stock despite hav­ing enough evi­dence to choose the good stock
• Risk-aver­sion mis­takes, in which sub­jects invest­ed in bonds lat­er in the game instead of the good stock

Kuh­nen and col­leagues found that, com­pared to younger adults, old­er adults made sig­nif­i­cant­ly more risk-seek­ing and con­fu­sion mis­takes. Specif­i­cal­ly, 32 per­cent of choic­es by the old­est third of adults (those ages 67 to 85) were risk-seek­ing mis­takes, com­pared to 24 per­cent of the choic­es by the youngest third (those ages 19 to 35). Con­fu­sion mis­takes account­ed for 8 per­cent of choic­es among the old­est third, com­pared to 3 per­cent among the youngest third. There was no sta­tis­ti­cal dif­fer­ence between the groups in risk-aver­sion errors.

Next, researchers val­i­dat­ed the results by com­par­ing them to real-world out­comes. They found that vol­un­teers who report­ed the great­est actu­al wealth also made the high­est pro­por­tion of ratio­nal invest­ment choic­es dur­ing the exper­i­ment. Then Kuh­nen and col­leagues looked at imag­ing results for the 54 sub­jects whose brains were scanned as they played the game. They focused on risk-seek­ing errors because they account­ed for the high­est per­cent­age of mis­takes. After con­trol­ling for age, they found a sig­nif­i­cant rela­tion­ship between noisy” sig­nals in the emo­tion­al brain and risk-seek­ing mis­takes among the old­est third of sub­jects. No such rela­tion­ship was seen among the youngest third of sub­jects. There was no cor­re­la­tion between risk-seek­ing mis­takes and reac­tions in oth­er brain areas, includ­ing the pre­frontal cor­tex, which reg­u­lates the ratio­nal brain.

The find­ings sug­gest that old­er adults will make bet­ter deci­sions when pro­vid­ed with objec­tive infor­ma­tion, Kuh­nen says. A fol­low-up study is look­ing at whether pro­vid­ing infor­ma­tion about expect­ed val­ues of invest­ment options can help reduce risk-seek­ing mis­takes by old­er adults. Kuh­nen says pol­i­cy mak­ers might want to con­sid­er pro­vid­ing the elder­ly with low-cost finan­cial plan­ning services.

You want to over­ride the noisy val­u­a­tion sig­nal in the emo­tion­al brain with hard infor­ma­tion so peo­ple can make bet­ter choic­es,” she says.

Featured Faculty

Camelia Kuhnen

Faculty member in the Finance Department until 2013.

About the Writer

Denise Gellene is a freelance science and business writer living in Los Angeles, Calif.

About the Research

Samanez-Larkin, Gregory R., Camelia M. Kuhnen, Daniel J. Yoo, and Brian Knutson. 2010. “Variability in nucleus accumbens activity mediates age-related suboptimal financial risk taking.,” The Journal of Neuroscience, 30(4):1426–1434.

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