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Why are older investors less willing to take financial risks?

Chris Brooks, Ivan Sangiorgi, Carola Hillenbrand and Kevin Money

International Review of Financial Analysis, 2018, vol. 56, issue C, 52-72

Abstract: We investigate the link between age and tolerance of financial risks in the context of attitude to risk questionnaires completed by clients when meeting their financial advisors. Using a unique database comprising the responses to over half a million such questionnaires, we show that risk tolerance declines at an increasing, albeit slow, rate with age. We investigate the explanatory power of the ability to bear losses, declining investment horizon and retirement effects, finding that these variables have considerably greater explanatory power for the cross-section of risk aversion than age, and that they are only able to partially mediate the link between age and risk tolerance. We are unable to uncover any evidence that declining cognitive abilities among older investors are able to explain their lower willingness to take financial risks. Overall, our results are indicative of a modest age effect in risk tolerance that cannot be attributed to changes in other observable characteristics that differ between younger and older investors.

Keywords: Retail investors; Risk tolerance; Attitude to risk; Effect of aging; Cognitive decline (search for similar items in EconPapers)
JEL-codes: G11 G20 J14 C25 (search for similar items in EconPapers)
Date: 2018
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