Risky and non-risky financial investments and cognition

Nicolau Martin-Bassols

Journal of Economic Psychology, 2024, vol. 100, issue C

Abstract: Much policy attention has been placed on encouraging saving behaviours to avoid financial deprivation at older adulthood. However, optimising financial investments is highly dependent on cognitive capacity, which can be deteriorated by the natural ageing process. This paper explores the relationship between age-related cognitive deterioration with risky and non-risky financial investments. The data analysed comes from eight waves (2002 to 2019) of the English Longitudinal Study of Ageing (ELSA) which, for a nationally representative sample, contains information about cognitive ability and their ownership of financial investments over time. Cognition emerges as one of the strongest predictors of the type and number of financial products that individuals hold. Specifically, the results show a positive relation of cognitive level with risky and non-risky financial investments. Even alongside other important factors – such as education, labour status, age, and household wealth – the explanatory power of cognition is found to be significant at the 0.1% significance level. The results are robust when accounting for unobservables and when using a genetic measure of cognition as main explanatory variable. More importantly, cognitive deterioration is only significantly associated with risky financial investments. That means, individuals reduce their risky financial investments when they start suffering old age related cognitive deterioration, while they do not change their holdings in non-risky ones in a significant manner. There are also no significant differences in the reactions to stock-market fluctuations due to cognitive level. In other words, individuals react to stock market fluctuations changing their financial holdings, but those reactions do not differ due to their cognitive level.

Keywords: Ageing population; Cognition; Risky assets (search for similar items in EconPapers)
JEL-codes: D91 G41 G51 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joepsy:v:100:y:2024:i:c:s0167487023000788

DOI: 10.1016/j.joep.2023.102677

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