Cognitive Ability and the Stock Reallocations of Retirees during the Great Recession

• Published in: The Journal of consumer affairs 2015-06, Vol.49 (2), p.356-375
• Main Authors: BROWNING, CHRIS, FINKE, MICHAEL
• Format: Article
• Language: English
• Subjects: Asset management; Assets; Cognitive ability; Company business management; Company investment; Economic conditions; Great Recession; Intellect; Intelligence (Psychology); Intelligence levels; Investment management; Investments; Management; Markets; Old age; Psychological aspects; Psychological research; Recessions; Retirees; Retirement; Retirement benefits; Saving; Savings bonds; Stocks; Studies
• ISSN: 0022-0078; 1745-6606
• DOI: 10.1111/joca.12065

Retirees are increasingly responsible for managing their retirement savings. The ability to manage these assets efficiently can have an important impact on retirement well-being. Lower levels of cognitive ability in old age can reduce an investor's ability to control emotional responses to a loss. Greater sensitivity to loss may increase preferences for safety following a market decline, resulting in allocations away from stocks that are associated with long-term underperformance. We investigate whether cognitive ability is related to stock reallocations among retirees during the Great Recession. Using the Health and Retirement Study, we find that cognitive ability is negatively related to allocations away from stock. Compared to those with the lowest levels of cognitive ability, respondents with higher cognitive ability are 40% less likely to reduce their stock allocation by 50% or more. These results suggest that the quality of investment decisions in old age may be compromised by cognitive decline.