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Monday 3 April 2017

Age Makes You Happier - And Poorer

Avoidance Strategies

As the years pass I've noticed I'm increasingly unwilling to expose myself to sources of negative information or emotional stress. So news bulletins, soap operas and anything a film critic might regard as emotionally engaging are increasingly off-limits. Frankly I'd rather watch Guardians of the Galaxy than Moonlight, no matter how worthy the latter.

Slightly to my surprise it turns out that this isn't just me being more than normally antisocial, but is a commonly observed age-related change in preferences. By choice older people will habitually avoid stuff that they find negative. Which goes a long way to explaining a lot of things, including why older nuns tend to be happier and why we should avoid having to do anything difficult - like thinking or active investment - after we've reached 70.

Nun Bothering

The age-related positivity effect is the finding that older people prefer to focus on things that make them feel good rather than ... well, the opposite. Younger people tend to try to gather new information, but as you get older and the clock starts ticking ever louder the preference is to maximize feeling good rather than thinking smart.

To test this Quinn Kennedy, Mara Mather and Laura Carstensen went and bothered a bunch of nuns, who'd already answered some questionnaires about related topics 14 years before. They discovered that the younger nuns got grumpier when pressed about autobiographical details but the older sisters' moods changed for the better. This aligns with another study that shows that older people actively avoid attending to negative information:
"This attentional bias is consistent with older adults’ generally better emotional well-being and their tendency to remember negative less well than positive information."
Shrinking Event Horizons

The clue to this behavior is in the emotional well-being statement - older people tend to be better at emotional self-regulation and part of the way that they do this is to avoid exposing themselves to information that upsets them. Which means that they're less likely to seek out information which contradicts their existing opinions: so neither doddery Democrats nor retired Republicans are likely to let pesky facts change their beliefs.

The suggestion is that this change in behavior is driven by a change in expectation of future time horizons. Or to be more blunt, you're less and less bothered about long-term planning and more and more concerned about short-term satisfaction the closer you get to dying.

Now the corollary to this, you might expect, is that older people will make worse decisions. After all, if you're unwilling to expose yourself to contradictory information then you're shutting down potentially valuable sources of data. However, research increasingly suggests that the decline in cognitive skills associated with aging is compensated for by a combination of better problem solving skills and greater emotional self-control.

Aged Problem Solvers

In essence, older people have a wider range of strategies to deal with the situations they're confronted with and are better at managing their own feelings in order to achieve the outcomes they desire. As expressed by Fredda Blanchard-Fields in Everyday Problem Solving and Emotion:
"Older adults are more likely than young adults to combine (a) actions directly targeted to the source of their problems with (b) emotion-regulation strategies that buffer psychological stress. This suggests that when solving everyday problems older adults display more complex, flexible, and emotionally mature functioning than otherwise expected"
So perhaps this greater emotional detachment and wider range of strategies might help older investors compensate for cognitive decline? Well, up to a point.

The point being about 70 years old.

The Cognitive Investment Cliff

In Do Older Investors Make Better Investment Decisions? the authors George Korniotis and Alok Kumar find that older investors do have better decision making heuristics than younger ones. They also find that older investors have better diversified portfolios, trade less frequently and are generally less impacted by behavioral bias. All these we would regard as unequivocally good qualities in an investor.

Unfortunately older investors then go on to achieve much worse performance, which is rather disappointing given that they seem to be doing all the right things:
"Consistent with the psychological evidence, we find that older investors exhibit worse stock selection ability and poor diversification skill. The age-skill relation has an inverted U-shape and, furthermore, the skill deteriorates sharply around the age of 70"
Basically it doesn't matter how immune you are to behavioral biases, if you can't actually select decent investments you're still going to underperform - in this case to the very significant tune of 3% to 5% per year.

When the Facts Change ...

Korniotis and Kumar make the not unreasonable suggestion that this decline is directly related to increasing cognitive impairment but it seems probable that there's also a link across to an increasing unwillingness by older investors to expose themselves to negative information. I'm all in favor of letting investments run, but you have to be open to the possibility that the facts are changing.

And the fact is that outstanding businesses that generate above average returns will usually carry on doing so for years and years but that's not forever, because eventually even the best companies will run into some kind of problem. Sometimes those problems destroy the moat that allowed them to make excess returns in the first place.

Meanwhile most of our investments are not going to generate excess returns - or if they do it won't be for very long, because without an unassailable moat competition will arise that will seek to grab some of that profit. So analyzing financial statements and reviewing key announcement is critical, even if your default position is to do nothing.


However, if you're an older, emotionally regulating investor, that does their very best to avoid being faced with adverse information, your default position is to not do this kind of analysis. In fact, as we saw in Backfiring Investment Theories if you can't actually bring yourself to believe in the possibility of a negative outcome you can't even start to cognitively process that information, you simply blank it out.

If you add this aversion to negative information to the undoubted cognitive decline that affects all of us with the onrushing years it's not hard to see why investment returns start to fall off. Almost certainly most older investors would be better off running a passive portfolio (although, to be fair, that's a statement that could generalize to all investors), but if you can't bring yourself to do that you have to keep exercising the grey matter and confronting the challenges of the real world of investment.

Face the Fear

So, in summary, the age related positivity effect predicts that people of seventy and above will generally avoid any news that contradicts their existing opinions and will make increasingly poor decisions based on outdated or biased information. The investment impact of such decisions is significant.

Of course, if you're a nun who doesn't need to worry about a stock portfolio then a gradual descent into a happy, clappy world of perpetual positivity is fine but otherwise you really need to face up to your fears and address the facts as they are, rather than as you want them to be. The alternative is poverty, or worse.

Age related positivity effect added to the Big List of Behavioral Biases

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