Age Makes You Happier - And Poorer

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.

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

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