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2014 Conference

April 9–11, 2014

Intercontinental, Milwaukee, WI

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Did Cognitive Ability Affect the Stock Reallocation Decisions of Older Investors During the Great Recession

Friday, April 11, 2014 at 10:45 AM–12:15 PM Central Time (US & Canada)
Salon 3
Short Abstract

The frameworks for making retirement decisions are complex and require the accurate estimation and effective use of multiple inputs for individuals to be successful in meeting their retirement goals. The rational expectation is that individuals will make decisions based on the utility gained from wealth over their lifetime, not the current state of the marketplace they are participating in. However individual investors have been found to be loss averse - more sensitive to losses than gains. In the midst of a negative financial event, this causes a shift in focus from long-term consumption to the variability of recent returns. The great recession provides an opportunity to observe the portfolio reallocation decisions of individual investors when they face severe reductions in stock values.

There is concern that individuals with diminished cognitive ability are more susceptible to behavioral biases, such as loss aversion, when making investment decisions in a volatile market. Using the Health and Retirement Study we explore the relationship between cognitive ability and the stock reallocation decisions of older investors during the great recession. We provide evidence that older investors with lower levels of cognitive ability are more likely to allocate away from stocks after they have fallen in value.

First & Corresponding Author

Chris Browning, Ph.D.,

Add'l Authors In The Order To Be Printed

Michael Finke, Ph.D., Texas Tech University
Sandra J. Huston, Ph.D., Texas Tech University