Twenty-somethings More Risk Averse Than Seniors

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by: Roger Dooley

New neuroscience research shows that older individuals are less affected by the possibility of losing money than younger people. Gains, meanwhile, are equally attractive to both groups.

Gregory Larkin at Stanford University in California, US, and colleagues compared the way the over 65s respond to losing and winning, compared with people aged between 19 and 27.

Participants were shown cues telling them they could either win or lose money. They had to rate their own excitement at the prospects while their brain activity was monitored using functional magnetic resonance imaging (fMRI).

The researchers found in both the self-reported tests and the fMRI scans, that younger adults showed more activity their insula and caudate – areas of the brain involved in processing emotion – when anticipating losses than the elderly. However, when winning money activity in the “emotion” area was the same regardless of age. From Younger generation has greater fear of loss.

This work is a surprise – often neuromarketing and neuroeconomics studies do little more than confirm what we already knew about behavior and perhaps provide better understanding of why that behavior occurs. In this case, the findings that old people are less affected by the prospect of losing money is somewhat counterintuitive. One might expect twenty-somethings to be spendthrifts, and, extending that to the area of financial decision making, one would expect a high tolerance for risk. Conversely, one might imagine that most seniors would be extremely sensitive to the potential of losing money, and would prefer extremely stable and safe investments.

Perverse Programming. In fact, it seems that our brains are programmed in a rather perverse manner, at least from an investment standpoint. Young people starting their career should, from a portfolio standpoint, favor riskier, more volatile investments that yield higher returns due to their long-term investment horizon. Seniors, on the other hand, should favor stable, low risk investments that may have lower returns but don’t have much volatility. All things being equal, this research suggests that young people might shy away from the sorts of investments they should be making, and oldsters might find those inappropriate investments more attractive. Of course, there’s a lot of information in the financial marketplace telling people how to invest that no doubt usually offsets these hard-wired leanings. (The study may also show why financial scams often succeed in bilking seniors out of their savings. In some cases, the explanation may be diminished capacity due to Alzheimers or other illness; in other cases, though, mentally able seniors may fall for scams because they don’t perceive as much risk as they should.)

Marketers Take Note. This work could have important implications for marketers of a variety of products, but particularly financial services like investments and insurance. While marketers of these products are likely to segment their marketing anyway due to greatly differing financial needs between twenty-somethings and seniors, recognizing the differences in risk perception should influence the marketing details. Selling financial products to young people should certainly hit the key marketing points of compounding and the big future value of an investment made today, but should also address the safety concerns that this customer group should have. Selling investments to older consumers shouldn’t ignore concerns about the safety of the products, but stressing the upside (high dividends or capital appreciation) will be the more effective marketing approach.

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