Thursday, March 30, 2006

Does Investment Skill Decline Due to Cognitive Aging or Improve with Experience? by George Korniotis, Alok Kumar

Gee, another "why hadn't I thought of that?" one. (uh no comment!)

SSRN-Does Investment Skill Decline Due to Cognitive Aging or Improve with Experience? by George Korniotis, Alok Kumar:
"The economic costs of aging are considerable - older investors earn roughly 2% lower annual returns on a risk-adjusted basis. Collectively, our results are consistent with the hypothesis that older investors' portfolio choices reflect greater knowledge about investing but their investment skill deteriorates with age...."
While I am a tad unwilling to chalk up the lower returns totally to "declining congnitive abilities" (it could be that they are "out of the loop" and hence more uninformed), it is an interesting look at how aging affects investing.

Actually I am surprised this one hasn't had more play in the popular press! I just googled it and it did appear on MoneyScience, but no where else appeared. Weird.

Cite:
Korniotis, George M. and Kumar, Alok, "Does Investment Skill Decline Due to Cognitive Aging or Improve with Experience?" (January 2006). Available at SSRN: http://ssrn.com/abstract=767125

1 comment:

Gas Fairy said...

I could be interpreting incorrectly, but from the raw data, it looks like the study used a time period of 6 years and selected it's sample from a population of discount-brokerage investors in California. They tested the sample and concluded that it was representative of the entire universe of investors. If skimming correctly, it appears that everyone lost money during the sample period. Also, the older group's portfolio had lower standard deviation of returns, but, given standard deviation differences, the alpha and Sharpe Ratio tests weren't statistically different between groups. It also appears that, on an adjusted basis, in addition to age differences, the poor and less educated outperformed the rich and more educated (although I'm probably missing something by drawing an old-rich-smart/young-poor-dumb inference from the study).