Stanford – Older investors prone to mental misfires while playing the market

This is not a major difference but suggests a growing area of concern since wealth management professionals may be at legal risk because of this kind of behavior which occurs with normal again.  It is also more likely in men and with men and women under stress.  Like now.

ScienceDaily (Feb. 10, 2010) – In a paper published in the Journal of Neuroscience, the researchers show that older investors make more errors when picking stocks compared to younger people playing the market. And that’s not because of senility, memory lapses or other cognitive declines often associated with growing older.

Instead, the problem rests with a senior’s ability to estimate value.

Functional magnetic resonance imaging results showed that greater variability or “noise” in a subcortical region of older people’s brains was related to making the investment mistakes.

“When we looked at their neural activation we didn’t see problems in memory circuits, but we saw a noisier signal in value circuits,” said Brian Knutson, associate professor of psychology and neuroscience.

The study showed that older people were just as willing as younger investors to make the riskier choice of buying stocks instead of bonds.   But the seniors more frequently picked the stock with worse performance, usually because they made their choices before having a full picture of the stock’s ups and downs.

While 20-year-olds made those mistakes 20 percent of the time, 80-year-olds made the errors 30 percent of the time.

The older subjects didn’t seem to forget information about a company’s gains and losses when it came time for them to pick a stock.   Instead, their brain signals seemed to wander more while they were making their decisions.

“We don’t know what causes the noise,” Knutson said. “The subjects might have been thinking about their grandchildren or something else of value. The problem is that this signal variability may be leaking into the financial risk-taking task at hand.”

“By identifying the psychological processes that are being disrupted in older people, we may be able to target interventions that improve these brain signals,” Samanez-Larkin said.