Age
How does someone's age affect their willingness to make risky investing decisions?
01
Risky assets
As people get older, they tend to invest more wealth into risky assets until they retire, when they begin to invest in fewer risky assets. A 1992 study by Riley and Chow found that investors 55-64 years old put over 6% of their investments in risky stocks, while investors in their twenties invested just 3% of their money in these stocks. However, after the age of 65, this figure decreased again to about 4%, demonstrating that a person's tendency to make risky decisions increases until retirement, when it decreases dramatically.
03
Age is not Independent
However, age is not an independent variable. Older people also tend to be far more wealthy than younger people and have the financial means to be able to take many financial risks. This means that the effect that age has on investing tendencies may not be as strong as other studies may have indicated. For example, a poll by Evestnet found that 42 percent of people aged 45-65 became more cautious in their stock market choices following market fluctuations, while only 36 percent of people aged 25-44 did the same.
02
Risk Aversion Index
The same study by Riley and Chow directly measured the risk aversion index of various groups. This is an index that measures the financial return someone feels they would need in order to take a financial risk, and a higher number indicates that someone is more risk-averse. This index mirrored the proportion of stocks in risky assets, as risk aversion decreased until retirement, when it increased dramatically again. This study again indicates that age has a dramatic effect on a person's tendency to make risky investing decisions.
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Age appears to directly affect risk aversion in investing. However, age directly relates to wealth, and wealthy people also tend to take more risks, so age is not an independent variable.