Investors’ Risk Preference and Age in Korean Defined Contribution Plans

Abstract

Our study investigates the relationship between investors’ age and investment risk preference. We use a unique dataset—defined contribution plan account data (observations = 18,781), provided by a Korean financial institute (a recording-keeping service provider). Investment risk preference is measured by three variables: share of equity, five-year volatility of selected funds, and share of principal guaranteed products. While controlling for individual characteristics such as gender, employee status, plan duration, wage, accumulated assets, and number of employees, we test the relationship between individuals’ age and investment risk preference in asset allocation. Echoing the results of previous studies, we find that age is significantly related to investment risk preference. Both equity share and volatility have an inverted-U-shaped relationship with age, and the share of principal guaranteed products has a U-shaped curve coinciding with age. Our results indicate that age is associated with increased risk preference due to learning effects and greater financial understanding. However, after reaching a certain point, risk preference decreases because of the need for a secure retirement income. Finally, the estimated coefficients of the interaction effect variables show that some individual groups—executives, high earners, and large asset holders—are more risk-taking than are other same-age groups. Key words: Retirement Pension Fund; Pension Service Provider; Defined Contribution Participants; Investment Risk Preference; Age JEL Classification: G10, G20