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.