CHANGING ATTITUDES TOWARDS RISK AS WE GET OLDER: New evidence that ageing societies become more risk-averse

Societies become considerably more risk-averse as their average age rises, which may have important consequences such as reducing investment in the stock market or the extent of self-employment. These are the central findings of new research by Thomas Dohmen, Armin Falk, Bart Golsteyn, David Huffman and Uwe Sunde, published in the October 2017 issue of the Economic Journal.

Their study analyses representative datasets from the Netherlands and Germany to show that there is a substantial decline in willingness to take risks as a country''s population gets older. For example, a rise of 10 years in a society''s median age leads to a reduction in risk attitudes with an effect size equivalent to 2.5% less investment in stocks or 6% less self-employment.

The researchers note that the average age of the population is rising in many developing countries. This is likely to have far-reaching implications for individual and collective decision-making. For example, conventional wisdom says that older people are more conservative and less willing to take risks.

If true, this would have important consequences for economic, political and social outcomes. Attitudes towards risk have a key impact on economic decisions (for example, decisions about savings, investment and labour market activity), demographic outcomes (for example, decisions about fertility) and socio-political behaviour (for example, voting).

Until now, however, there has been little empirical evidence to shed light on the potential link between ageing and risk attitudes. The new study shows that willingness to take risks does indeed decrease over the life course.

To provide this evidence, the researchers address a key challenge that arises in identifying age profiles: the fact that age is intimately linked to birth cohort and periods of observation, which may all be related to some extent to stated risk attitudes.

Older people may become less willing to take risks due to biological ageing processes – as is suggested, for example, by evidence that cognitive ageing is associated with declining willingness to take risks.

Cohort effects may reflect common experiences during particular points in life. For example, the experience of war or a major crisis might affect risk preferences. The same is true for fashions and patterns, such as cohort-specific variation in breastfeeding patterns.

Finally, the period of observation may affect risk attitudes since recent events change individual expectations and thereby affect expected lifetime wealth. For example, a financial crisis might affect the willingness to take risk.

Methodologically, it is difficult to disentangle the effects of age, birth year and period of observation on risk attitudes because age is a perfect linear combination of birth year and survey period.

The study uses an identification strategy that makes it possible to separate age effects from period and cohort effects. The data are from two different, large, representative datasets, one from the Netherlands and one from Germany, each of which provides evidence for the age trajectory of risk attitudes all the way from early adulthood until old age.

Identification is achieved by replacing calendar period indicators with controls for the specific underlying factors that may change risk attitudes across periods. The empirical results indicate that willingness to take risks declines with age once calendar time and cohort effects are taken into account.

The size of this effect is substantial: an increase of 10 years in the median age of a society leads to a reduction in mean willingness to take risks of 0.23 standard deviations, which is equivalent to 2.5% less investment in stocks or about 6% less self-employment.

Such a change amounts to approximately half of the well-documented difference in willingness to take risks between men and women. These findings suggest that societies become considerably more risk-averse as a consequence of population ageing.

''Risk Attitudes Across the Life Course'' by Thomas Dohmen, Armin Falk, Bart Golsteyn, David Huffman and Uwe Sunde is published in the October 2017 issue of the Economic Journal. Thomas Dohmen and Armin Falk are at the University of Bonn. Bart Golsteyn is at Maastricht University. David Huffman is at the University of Oxford. Uwe Sunde is at the University of Munich.