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How Age Influences Investment Moves

BOSTON (TheStreet) -- When it comes to financial decisions and investing strategies, who does a better job: young, tech-savvy investors or their conservative, old-school elders?

Bad news for the adults: Research by Stanford University and Northwestern University's Kellogg School of Management found evidence that older investors may be more prone to make bold moves and bad choices.

Younger investors may be making better financial choices than their elders.

In technical terms, "a variability in nucleus accumbens activity" may be to blame for irrational financial decisions made by some older investors. Put more simply: daydreaming.

The researchers found evidence that older investors are more prone to distractions and wandering thoughts that result in taking unnecessary risks and choosing stocks that they should otherwise have known to back away from. Poor decision-making isn't necessarily the result of senility, memory lapses or other cognitive declines that go hand in hand with aging.

As part of their study, men and women between the ages of 19 and 85, while having their brains scanned by an MRI, were put through a game that involved choosing among various stocks and bonds. Older subjects proved just as willing as younger ones to choose riskier investments, stocks over bonds. But the older participants more frequently made rash decisions, choosing stocks before they even considered performance and earnings data available to them. In some cases, they were well aware of companies' earnings, gains and losses, but chose weaker offerings nonetheless.

It wasn't forgetfulness that led to bad choices, but what the researchers referred to as "noise" -- other thoughts "leaking" into the task at hand.

In terms of brain chemistry, the release of the neurotransmitter dopamine -- traditionally thought to decline with age -- spiked during the experiment and could be partly to blame for the randomness of the choices made.

"We don't know a whole lot about how aging affects decision-making, particularly in the financial realm," says Brian Knutson, associate professor of psychology and neuroscience at Stanford University. "This is becoming increasingly important because the global population is aging, and so the financial decisions people make as they age are going to become an increasingly important aspect of the economy."

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