Chasing Winners in the Gray Wave: Aging Population and Its Effects on Long-Horizon Momentum Profits

Abstract

The momentum effect is postulated to be a consequence of the disposition effect, which in turn, is a result of the interplay between the typically dominant diminishing sensitivity feature of prospect theory and the loss aversion feature. However, studies have shown that older individuals can exhibit a reverse disposition effect due to their heightened loss aversion compared to younger individuals. This paper hypothesizes that as the population ages, the disposition effect of the average investor starts to diminish, thereby inducing a corresponding weakening of the momentum effect. We find empirical evidence showing that the long-horizon momentum profits are negatively related to changes in the proportion of the older population.