Cognitive Ageing and Risk Attitude
24 Pages Posted: 1 Mar 2012
Date Written: January 1, 2012
In this paper we investigate to what extent the decrease in the willingness to take risks with age can be traced to the cognitive ageing process. We use data from the Survey of Health, Ageing and Retirement in Europe (SHARE) that includes both a measure of financial risk preference and measures of cognitive ability for a representative sample of individuals aged 50 in 11 European countries. The availability of a large set of variables in SHARE allows us to control for potential confounding factors that may be related to both cognitive skills and risk attitudes. Conditional on socio-demographic characteristics, about two fifth of the agerelated cross-sectional difference in willingness to take risks can be explained by a noisy measure of cognitive skills. Due to the attenuation bias that results from measurement error in the cognitive skills measure, this is a lower bound estimate. Using the lag of the measured cognitive score as an instrument for the noisy contemporaneous cognitive skills measure, we show that about 70% of the difference in willingness to take risks between cohorts can be traced to age-related differences in cognitive skills.
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