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Does cognitive aging affect portfolio choice?

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  • Pak, Tae-Young
  • Babiarz, Patryk

Abstract

The association between cognitive aging and portfolio reallocation towards riskless assets is well documented. Past studies have suggested several mechanisms such as rising information costs or preference changes to explain the shift away from financial risk. However, these narratives appear to be at odds with the evidence that some domains of cognitive functions improve with age, and many individuals are not cognizant of their intellectual decline. Using data from the Health and Retirement Study, this study examines whether or not cognitive decline leads to a safer portfolio choice and how much can be attributed to causal. Our empirical analysis develops an instrumental variable approach that exploits seasonal variation in cognition triggered by a seasonal affective disorder. While the fixed effects estimates show strong positive correlations between cognition and stock ownership, these estimates lose significance in the instrumental variable models. Our findings suggest that cognitive function is not a major determinant of portfolio riskiness.

Suggested Citation

  • Pak, Tae-Young & Babiarz, Patryk, 2018. "Does cognitive aging affect portfolio choice?," Journal of Economic Psychology, Elsevier, vol. 66(C), pages 1-12.
    • Handle: RePEc:eee:joepsy:v:66:y:2018:i:c:p:1-12
    DOI: 10.1016/j.joep.2018.03.001
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    Cited by:

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    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. Choung, Youngjoo & Chatterjee, Swarn & Pak, Tae-Young, 2022. "Depression and financial planning horizon," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 98(C).
    4. Martin-Bassols, Nicolau, 2024. "Risky and non-risky financial investments and cognition," Journal of Economic Psychology, Elsevier, vol. 100(C).
    5. Friehe, Tim & Pannenberg, Markus, 2019. "Overconfidence over the lifespan: Evidence from Germany," Journal of Economic Psychology, Elsevier, vol. 74(C).
    6. Ye, Zihan & Zou, Xiaopeng & Post, Thomas & Mo, Weiqiao & Yang, Qianqian, 2022. "Too old to plan? Age identity and financial planning among the older population of China," China Economic Review, Elsevier, vol. 73(C).
    7. Haidong Yuan & Chin-Hong Puah & Josephine Tan-Hwang Yau, 2022. "How Does Population Aging Impact Household Financial Asset Investment?," Sustainability, MDPI, vol. 14(22), pages 1-14, November.
    8. Thiago Christiano Silva & Benjamin Miranda Tabak & Idamar Magalhães Ferreira, 2019. "Modeling Investor Behavior Using Machine Learning: Mean-Reversion and Momentum Trading Strategies," Complexity, Hindawi, vol. 2019, pages 1-14, December.
    9. Pak, Tae-Young, 2023. "Relative deprivation and financial risk taking✰," Finance Research Letters, Elsevier, vol. 55(PA).
    10. Wang, Xiqian & He, Zongyue, 2024. "Household response to health shocks: Does broadband infrastructure have a role to play?," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 1353-1370.

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    More about this item

    Keywords

    Cognitive functioning; Portfolio reallocation; Stock market participation; Seasonal affective disorder;
    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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