Cognitive Functioning: An Underlying Mechanism of Age and Gender Differences in Self-Assessed Risk Tolerance among an Aging Population

Muna Sharma,Swarn Chatterjee

doi:10.3390/su13042361

Abstract

Attitude toward risk plays a vital role in an individual’s financial decision-making and well-being. Past studies have found significant association of age and gender with risk tolerance. However, studies on the factors affecting the underlying mechanism are scant. The purpose of this research is to test whether cognitive functioning mediates the association between age, gender, and self-assessed risk tolerance. Using the 2014 wave of the Health and Retirement Study, path analysis was conducted to test the hypothesized model. Results revealed a negative direct association between age and risk tolerance. Moreover, the study also found a lower level of risk tolerance in women. A bootstrap-based confidence interval revealed that a significant portion of the relationship between age and risk tolerance was mediated by cognition. However, the gender difference in risk tolerance was not explained by cognition. Financial planning practitioners and policymakers should understand the contribution of cognitive functioning toward the difference in risk tolerance in older populations and implement strategies to reinforce cognitive functioning to mitigate the adversity of a low level of risk tolerance.

Highlights

Risk tolerance, conceptualized as the willingness to accept uncertainty in making financial decisions [1], is a fundamental topic for investigation in behavioral economics [2].Risk tolerance of an individual plays a crucial role in the household’s economic and financial decisions, affecting the financial sustainability of their portfolio upon retirement [3].Attitude toward risk impacts an individual’s economic decision making in a myriad of contexts
This study presented a decomposition of age and gender differences in risk tolerance
Results showed that an increase in age was associated with a lower level of risk tolerance, and 25% of this reduction was accounted for by cognitive functioning

Summary

Introduction

Risk tolerance, conceptualized as the willingness to accept uncertainty in making financial decisions [1], is a fundamental topic for investigation in behavioral economics [2].Risk tolerance of an individual plays a crucial role in the household’s economic and financial decisions, affecting the financial sustainability of their portfolio upon retirement [3].Attitude toward risk impacts an individual’s economic decision making in a myriad of contexts (e.g., decisions about consumption, savings, investments, and labor force participation). Risk tolerance of an individual plays a crucial role in the household’s economic and financial decisions, affecting the financial sustainability of their portfolio upon retirement [3]. Investors who are more willing to take risks are more likely to invest in risky assets, such as stocks, and earn more returns in the long term [3], which results in greater wealth accumulation over time [4]. People with a greater stock of financial risk tolerance are associated with engaging in more financially sustainable behavior by investing into riskier assets, such as equities and equities-based mutual funds, which results in greater wealth accumulation and sustainable retirement savings over time [5]. Risk tolerance plays a significant role in maintaining the financial sustainability of households over time [6]

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