A neuroeconomic perspective on age and risk-taking behavior

J. Schützeichel, T. Michl

Research output: Chapter in Book/Report/Conference proceedingConference contributionAcademic


Germany like other developed countries in the world is confronted with an aging population (Beddington et al., 2008). The development of these countries is closely connected with the productivity of older people, both economically and socially, because older people are the majority in our societies. Financial decisions of aging investors will have an increasing impact on the global economy. Therefore it is necessary to investigate risk-taking behavior of elderly people to give implications for daily economic and social life. Recent neuroscientific and neuroeconomic findings show how aging may disrupt rational financial choice at a neural level. Thus, the aim of this study is to summarize these results and give implications for researchers and for practitioners: We focus on the well known effect that older adults are more risk-averse than younger adults and show how this is related to errors in decision-making processes and how these errors can be integrated in the daily financial decision-making and how to prevent such errors (Mohr et al., 2010). There are numerous studies in economic literature which studied the effect of age on risk-taking. These studies show that risk-taking is decreasing with age (Morin and Suarzez, 1983; Holmstrom and Milgrom, 1987; Kanodia et al., 1989; Riley and Chow, 1992). Using different measures such as observed portfolio allocations of wealth (Jianakoplos and Bernasek 2006) or large scale survey studies analyzing the whole population (Barsky et al., 1997; Donkers et al. 2001; Dohmen et al., 2006), these studies show the well known effect that willingness to take risk is decreasing with age. Using the Iowa Gambling Task, a task to measure ambiguity, various studies also find a negative correlation between risk-taking and age (Fein et al., 2007; Denburg et al., 2005, Zamarian et al.,2008). Further studies found that violations of expected utility theory are decreasing with age (Kume and Suzuki, 2010; Harbaugh et al., 2002). Contrary to these results is Wang and Hanna`s (1997) research. Using the 1983-1989 panel of the survey of consumer finances they find out that relative risk-aversion decreases as people age (i.e., the proportion of net wealth invested in risky assets increases as people age). They conclude that risk tolerance increases with age which is contrary to the constant life-cycle risk-aversion hypothesis. Other studies show differences between decision-making of older and younger people, but with regard to their risk-taking behavior. Surprisingly there are only few experimental studies which directly tested the demographical differences in risk-taking behavior in the laboratory. One reason for this might be that students are the standard subject pool in laboratory economic experiments and thus not suited to conduct age-related studies. However these few experiments have lead to the same result that risk-taking is decreasing with age (Deakin et al., 2004; Chou et al., 2007). In experimental economics and in neuroeconomics most studies and experiments are conducted with young subjects thereby neglecting possible age differences in economic behavior and associated neurocognitive mechanism (Mohr et al., 2010). Looking at neuroscientific and neuroeconomic studies which focus on the relationship between risk-taking and age can help to find out the underlying mechanisms of these stereotypic risk attitudes. There is only little evidence in neuroeconomics of how the brain is reacting to different risk attitudes among different demographic groups. Using fMRI Lee et al. (2008) investigate risk-taking behavior of young and old people and find that older individuals chose significantly less often the risky options. But when older individuals chose the riskier option, they had a stronger activation in the right insula compared to younger adults which is interpreted as an indication that the risky option is perceived as more risky by elderly than by young adults resulting in an increased avoidance of risky situations. A recent study by Samanez-Larkin and colleagues (2010) investigates age differences in financial decisions by combining functional neuroimaging with a dynamic financial investment task. Their behavioral results show that older adults make more suboptimal choices than younger adults when choosing risky assets. At the neural level they find that this behavioral age-related effect was associated to a temporal variability in nucleus accumbens activity indicating an age-related subcortical deficit which may lead to risky decision-making mistakes. To conclude, our review shows how aging disrupt rational financial choice behavior at a neural level. The neural mechanisms which lead to the risk-averse behavior of older people are diverse. Only little research has focused on this "deeper" neural analyze of aging and financial risk-taking (Peters et al., 2007; Mohr et al., 2010). Therefore we seek to fill this gap and analyze the neural evidence to give implications for real financial life.
Original languageEnglish
Title of host publicationProceedings of the LabSi Conference on Neuroscience and Decision-Making, 20-21 September 2010, Santa Chiara, Italy
Publication statusPublished - 2010


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