Which Makes a Better Investor: Youth and Flexibility, or Age and Wisdom?

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Who's smarter, a chicken or an egg? Do investors make better decisions when they're fresh-faced and bushy-tailed youths, or older, grizzled veterans of the stock market?

These are the kinds of questions that Ye Li, an assistant business professor at University of California-Riverside and his colleagues attempted to solve in a recent study, "Complementary Cognitive Capabilities: Economic Decision Making, and Aging," just published in the American Psychological Association's journal Psychology and Aging.

In case your subscription hasn't arrived in the mail yet, here's a quick outline of Professor Li's findings.

Smart Eggs, Savvy Chickens

As anyone who's tried to pick up a foreign language after graduating from college can tell you, the human brain tends to ossify with age. Learning new things gets harder and harder, the older you get.

Li and his team call this ability to learn new things "fluid intelligence." They note that it can be particularly important in helping younger people to process new information (such as learning how to "tweet" or "twerk") and facilitate decision-making.

On the other hand, it's a simple truism that the older you get, the more experience you rack up.

Over time, people are exposed to an ever-widening array of opportunities to accumulate new knowledge, and also to begin recognizing patterns in how those facts interact -- in how the world works. Li calls this knowledge "crystallized intelligence." (How much they take advantage of those opportunities, of course, is wildly variable.)

Advantage: Youth and Beauty

Which of these kinds of intelligence is more important for investors?

Forming two test groups, the first of 173 young adults ages 18 to 29, and the second of 163 seniors ages 60 to 82, Li's team put each group through a battery of tests to measure their fluid and crystallized intelligences, and to evaluate how well they made economic decisions.

What they found out was, in part, exactly what you'd expect: While the senior group had accumulated more financial knowledge (facts), the younger group had a significant advantage in fluid intelligence (the ability to learn new things).

Bigger Advantage: Age and Wisdom

What was more surprising -- and perhaps more encouraging -- is that over time, what seniors lose in fluid intelligence, they more than make up for with accumulated crystallized intelligence.

For example, when tested for their skill in estimating and weighing the importance of future losses and gains on investments, understanding financial information, and understanding how debt and interest rates work, seniors "performed as well as or better than younger participants on all decision-making measures."

Crunching the numbers, Li and his team concluded that even if fluid intelligence does decline with age, "older adults' higher levels of crystallized intelligence can provide an alternate pathway to good decisions."

In particular, financial literacy is like fine wine: It improves with age. What's more, understanding the effects of debt appears to increase significantly with age -- knowledge that one imagines may have been painful to acquire.

Fortunately, the two types of intelligence appear to be complementary -- such that a store of crystallized intelligence can make up for dwindling reserves of fluid intelligence.

Based on their results, Li and his team concluded that "older people were somewhat better decision-makers than younger people ... Having greater experience and acquired knowledge from a lifetime of decision making may have provided older people with another way to make good decisions."

Moral of the story: If a young Harvard Business grad tells you to buy a stock, but Warren Buffett says to sell it, listen to Mr. Buffett.

Motley Fool contributor Rich Smith worries he's too old to learn new tricks easily, but not yet old enough to have attained wisdom.

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Sanandave

I am amused that the phrase "fluid intelligence" is applied to the ability to learn how to "twerk". You have to be kidding me....!

October 03 2013 at 9:09 PM Report abuse rate up rate down Reply
tfarnon

I take my investing cues from my late grandmother. I'm not exactly young myself at 54, but I've been investing this way since my 30's, and I've done well by it. I ask myself: "What Would Grandma Buy?". My grandmother was no Luddite, and no fool, so just because she never owned a personal computer doesn't mean she might not invest in them today. What it does mean is that I invest in things and companies I understand, and go by her maxim: "If it sounds too good to be true, it IS too good to be true." I came through the recession with only a small loss, long since recouped. My portfolio is less volatile than the S&P 500, but not frozen. I diversify carefully. I do my research. I don't trade much. I like dividends. I'm okay with not chasing the Next Big Thing, or the highest rate of return. And in the end, investing as I think my grandmother would has been quite good to me.

October 03 2013 at 4:34 AM Report abuse rate up rate down Reply
betty_brock

It has been proven that a monkey can pick stocks as well as a broker.

October 02 2013 at 7:48 PM Report abuse rate up rate down Reply
Dan

What I've learned the hard way as a senior investor is to diversify my investments. Stocks over time is the only way you can count on to beat inflation. What I lost in stocks has all been regained and then some. Being the age I am, though, I use the "subtract your age from 100" method of stock purchase. Don't let your stock holdings exceed that number. Works for me!

October 02 2013 at 7:26 PM Report abuse +1 rate up rate down Reply
1 reply to Dan's comment
vlady1000

There are other was to beat inflation besides stocks with less risk and more control. They are just not available thru Wall Street

October 02 2013 at 11:02 PM Report abuse -1 rate up rate down Reply
msuboticki

So you have to be a professor to come up with that brilliant conclusion?
Yes, I am an investor and a senior!

October 02 2013 at 5:18 PM Report abuse rate up rate down Reply
mily469

with age has come the wisdom to never buy stocks.

October 02 2013 at 2:03 PM Report abuse -3 rate up rate down Reply
1 reply to mily469's comment
tfarnon

For some people, that's good advice. Some people blindly chase the next "hot" investment. "Hot" can get you burned. Most people don't want to invest in "boring" things, and don't want to be patient. So yeah, if you know yourself well, and know that you can't trust yourself to invest in stocks, you are better off avoiding them.

October 03 2013 at 4:36 AM Report abuse rate up rate down Reply