For the over 54-year-old Investor

Posted by Mike H on 13 September 2016 | Comments

Why 54 years old so important?

Because that is the age at which research shows that financial decision making is at its peak. After that it’s all downhill (fortunately very slowly).
Currently there is increasing research on decision making in people over 60.

For example, these studies compared the decision making of over 60 year old and teenagers.

You know those guys and gals who get drunk, drive too fast, experiment with drugs, have unprotected sex, get covered in tattoos and join the army; those ones! 

The studies showed over 60 year olds are often worse decision makers! Go figure…

http://www.psychologicalscience.org/index.php/news/were-only-human/youth-vs-age-who-makes-the-wiser-decisions.html

http://articles.latimes.com/2013/oct/01/science/la-sci-sn-do-we-make-poorer-decisions-as-we-age-20130930

What changes happen

  • We tend to become more optimistic, accentuating the positive and tending to ignore negative risks.
  • We also tend to become more trusting of others and defer to their opinions.
  • We are more interested in good social out comes rather than monetary ones.
  • Our ability to find creative solutions to new types of problems decreases (this starts in our thirties!)
  • Our numeracy and financial skills gradually fall -but not our confidence!
  • Our working memory decreases. Multitasking, complex problems and solutions cause difficulties.
  • We find learning and storing new information takes about 25 % longer
  • Our ability to focus consistently on details wanes.

 These may lead to the following behaviours:

  •  We may delay or avoid decision or make inconsistent decisions
  • We may not seek not seek all the information we need to make a fully informed decision.
  • We can actually become inappropriately less anxious about of the risk of loss
  •  We may ignore possible risks or dismiss them while we rely on hunches or instinct

 It makes evolutionary sense. In primitive societies as we gave up our alpha male and female roles that our brains would adapt to allow us to accept and be content with our new roles. Unfortunately, society has involved in such a way to make these changes often maladaptive.

http://www.nap.edu/read/11474/chapter/11

http://healthland.time.com/2013/09/30/why-older-people-tend-to-be-poor-decision-makers/

http://www.prb.org/Publications/Articles/2007/DecisionmakingandAging.aspx

http://sydney.edu.au/news/84.html?newsstoryid=12424
https://www.researchgate.net/publication/228251107_Old_Age_and_the_Decline_in_Financial_Literacy

 What are the positives?

We  have  excellent Crystalized cognition (better known as wisdom and experience).

Our Intelligence remains unchanged.

Finally these changes are hurdles: not road blocks!

We just need to work differently to what we have in the past. For example, these are some strategies that work for me

MANAGING OUR WEAKNESSES

Decreasing working memory

I try to make most of working memory “external” for my decision making.

  • When making decisions I organize it all on paper (risk analysis etc.)
  • I make and use check lists extensively

    (I use Colin Nicholson check lists when stock picking and monitoring for example)

  • When I come across new useful information I add it to its relevant check list.
  • I have a simple filing system store all of my decision making for easily accessible reviews

I find risk analysis is a “high risk” area. Setting aside adequate time and a checklist as a memory aid is important.

Learning and storing new information becomes harder and slower

But not impossible, it just takes longer.

  • allow 25 % longer time to digest information.
  • Use more aids, high lighters, under lining, grouping information into smaller (say 3 piece ) chunks
  •   Review new information regularly using flash cards,” post its “questions in books before review etc. Let quick reviews after acquisition after 1, 2 and 7 days 1, 6 and 12 months become part of your learning process
  • I make sure I get a good night sleep (a sound sleep cycle is important for learning effectively)

(advice from a neurologist specializing in the aging brain)

Tendency to dismiss or minimize negatives then relying on instincts and feelings

I regularly skim read my favorite information on financial psychology and the aging brain to keep my antennae up.E.g

http://www.inquiriesjournal.com/articles/180/decision-making-factors-that-influence-decision-making-heuristics-used-and-decision-outcomes

Concentration issues

I ‘ve worked out what time of the day I focus best and how long I can remain focused for optimal thinking time (2 hours first thing in morning)

WORKING THROUGH OUR STRENGTHS

Using Our Crystallized cognition

I invest in areas I have most experience and wisdom. If a strategy is not working, I look at altering it with in this area rather than attempting to try a completely new investment area

PREVENTION

Keeping my brain active and staying healthy

All the usually culprits are covered in this article. Reading it and doing it are two different things!

http://www.helpguide.org/articles/memory/how-to-improve-your-memory.

 Monitoring brain function

 The Brain Health Registry

 www.brainhealthregistry.org

Basically this site allows you to get a base score of your cognition ability and repeat the test every 6 months or so

  • My long term plan is to monitor my cognitive capacity and gradually increasing my core fund investments and decreasing my active investing load to match my capacity to manage complexity

 Planning for the future

 These are USA sites but their general gist is right

One tip I found useful is when choosing executors lawyers, financial planners etc look for ones who will not have retired when you live to 100 years old .

https://www.nia.nih.gov/health/publication/getting-your-affairs-order

Whilst I have offered strategies that work for me you may find them unnecessary or may not suit your circumstances.

http://www.investopedia.com/articles/financial-theory/10/financial-decisions-age.asp

CONCLUSION

Whilst these findings are useful some conclusions are based on weak evidence or contradictory to other studies. Research in this area is in its infancy and much more is needed. Unfortunately, just like investing, we can only act on the information we have.

Finally, if you have any doubts at all that you have more than normal aging symptoms please see your doctor.

The following site is reputable and lists early symptoms of Alzheimer’s Disease 

 https://www.nia.nih.gov/alzheimers/topics/symptoms

I hope you found this blog useful.

 

Regards

Mike H

"The views expressed here are the views of individual contributors and in no way should be construed to represent the views of the AIA, the Board, employees or volunteers. The AIA does not provide advice or recommend products or strategies. Readers should obtain professional advice before acting on any information provided in this Blog".