Cognitive Ageing and Risk Attitude

24 Pages Posted: 1 Mar 2012

See all articles by Eric Bonsang

Eric Bonsang

ROA; Netspar

Thomas J. Dohmen

Institute for the Study of Labor (IZA); Maastricht University - Business Investment Research Center (BIRC)

Date Written: January 1, 2012

Abstract

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.

Suggested Citation

Bonsang, Eric and Dohmen, Thomas, Cognitive Ageing and Risk Attitude (January 1, 2012). Netspar Discussion Paper No. 01/2012-004. Available at SSRN: https://ssrn.com/abstract=2013220 or http://dx.doi.org/10.2139/ssrn.2013220

Eric Bonsang (Contact Author)

ROA ( email )

P.O. Box 616
Maastricht, MD6200
Netherlands

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Thomas Dohmen

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Maastricht University - Business Investment Research Center (BIRC) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31-43-388 3832 (Phone)
+31-43-388 4856 (Fax)

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