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Seniors struggle with stock picks

It’s not memory loss or senility that leads to mistakes, but increased “noise” in parts of seniors’ brains, Stanford psychologists say. In a recent study, 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.

STANFORD (US)—Older investors make more errors when picking stocks, but not because of senility or memory lapses. The problem rests with a senior’s ability to estimate value.

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

For the study, 54 men and women between the ages of 19 and 85 played an investment game while their brains were being scanned. Findings were published in the Journal of Neuroscience.

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.

This subcortical region—the nucleus accumbens—is critical for evaluation, while higher cortical circuits are more important for storing symbolic information like numbers and words.

The game called for the participants to repeatedly choose to invest in either stocks or bonds. Some of the stocks performed well and had positive earnings over time, while others performed poorly.

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.

Older subjects were more prone to mental misfires while deciding to invest in one of two stocks. While 20-year-olds made 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 says. “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.”

As life expectancies increase and more seniors play the stock market, the findings could be used to help older investors make the best decisions with their money.

“By identifying the psychological processes that are being disrupted in older people, we may be able to target interventions that improve these brain signals,” says Gregory Samanez-Larkin, a psychology graduate student at Stanford.

Camelia Kuhnen, assistant professor of finance at Northwestern University’s Kellogg School of Management, contributed to the study, which was funded by the National Institute on Aging, the Financial Industry Regulatory Authority Investor Education Foundation and the Center on Advancing Decision Making in Aging.

Stanford University news: http://news.stanford.edu/

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