Why are Older Investors Less Willing to Take Financial Risks?
45 Pages Posted: 24 Apr 2017 Last revised: 14 Oct 2017
Date Written: October 2017
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. 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 ageing, cognitive decline
JEL Classification: G11, G20, J14, C25
Suggested Citation: Suggested Citation