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Aging, overconfidence, and portfolio choice

Author

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  • Pak, Tae-Young
  • Chatterjee, Swarn

Abstract

Research has shown that older investors’ confidence in financial skills and capability does not diminish with declining financial proficiency, and this overconfidence gap rather widens with age. Using data from the Cognitive Economics Study (CogEcon), this study examines whether and to what extent the age-related increase in overconfidence explains the riskiness of retirement portfolio. Results from the two-part models indicate that rising overconfidence is associated with a greater risky asset ownership and less share of cash equivalents, even after accounting for post-crash sentiment changes and market conditions. Further analyses find that financial advice plays an essential role in dampening the effect of overconfidence. Overall, our findings highlight the importance of cognitive bias in explaining late-life equity ownership and financial advisor as an emotional circuit breaker.

Suggested Citation

  • Pak, Tae-Young & Chatterjee, Swarn, 2016. "Aging, overconfidence, and portfolio choice," Journal of Behavioral and Experimental Finance, Elsevier, vol. 12(C), pages 112-122.
    • Handle: RePEc:eee:beexfi:v:12:y:2016:i:c:p:112-122
    DOI: 10.1016/j.jbef.2016.10.003
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    Citations

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    Cited by:

    1. Tae‐Young Pak & Lu Fan, 2022. "Childhood experience of parental affection and financial well‐being in later life: Evidence from the Health and Retirement Study," Journal of Consumer Affairs, Wiley Blackwell, vol. 56(4), pages 1433-1453, December.
    2. Pannenberg, Markus & Friehe, Tim, 2019. "Does it really get better with age? Life-cycle patterns of confidence in Germany," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203497, Verein für Socialpolitik / German Economic Association.
    3. Bonsang, Eric & Costa-Font, Joan, 2020. "Behavioral regularities in old age planning," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 297-300.
    4. Kumar, Satish & Rao, Sandeep & Goyal, Kirti & Goyal, Nisha, 2022. "Journal of Behavioral and Experimental Finance: A bibliometric overview," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    5. Friehe, Tim & Pannenberg, Markus, 2019. "Overconfidence over the lifespan: Evidence from Germany," Journal of Economic Psychology, Elsevier, vol. 74(C).
    6. Cotwright Marty & Chatterjee Swarn, 2022. "Equity Return Expectations and Financial Wealth Holdings of U.S. Households," Open Economics, De Gruyter, vol. 5(1), pages 1-10, January.
    7. Pak, Tae-Young & Babiarz, Patryk, 2018. "Does cognitive aging affect portfolio choice?," Journal of Economic Psychology, Elsevier, vol. 66(C), pages 1-12.
    8. Ben Amor, Salma & Kooli, Maher, 2024. "Does overconfidence affect venture capital firms’ investment?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 41(C).
    9. Shohei Okamoto & Kohei Komamura, 2021. "Age, gender, and financial literacy in Japan," PLOS ONE, Public Library of Science, vol. 16(11), pages 1-20, November.

    More about this item

    Keywords

    Cognitive aging; Cognitive bias; Overconfidence; Financial sophistication; Portfolio choice; Two-part model;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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