Older Investors May Be More Susceptible

Evidence suggests that older investors are more likely to shed equities in response to market downturns, indicating that they may be more susceptible to loss aversion.9

Researchers, including The American College of Financial Services’ Michael S. Finke, PhD, CFP® studied the behavior of 401(k) plan participants during the first quarter of 2020 when markets fell sharply in response to the COVID-19 pandemic. They found that, among those in self-directed 401(k) plans who made changes to their portfolios, older plan participants were much more likely to reduce their equity exposure than younger ones (see Figure 5).

Overall, the researchers found that the oldest 401(k) participants reduced their equity exposures by approximately 3%, versus close to 0% for the youngest participants.


There are several possible reasons why older investors may be more likely to sell during downturns than younger ones. From a biological perspective, this behavior may be a function of changes in the brain. Evidence suggests that the dopamine reward system, which plays a role in our feelings of pleasure from gains, may decline with age—older adults have a less intense dopamine response to positive events than younger ones. In contrast, the amygdala-based fear system does not decline with age but remains as potent in older adults as it is in younger ones. Thus, while older adults are just as fearful of loss as younger ones, they derive less pleasure from gains. They may, therefore, be more vulnerable to acting when they experience loss aversion.

In addition, from a practical perspective, with fewer years ahead to catch up on losses, older investors are even more motivated to stop the bleeding during market downturns—especially those who have an inappropriately high equity allocation at the start of the downturn.

Interestingly, the researchers also found that, while investors did return to equity markets once the downturn ended, a full reversal of their exit was rare—a hypothetical investor who started with an equity allocation of 85% and reduced that to 75% during the downturn would only inch up to, say, 80% once the market improved. This means that losses incurred by selling during a bear market are likely to be locked in, with little prospect for recovery.

9 David Blanchett, Michael S. Finke, and Jonathan Reuter. Portfolio Delegation And 401(k) Plan Participant Responses To COVID-19. June 2020.

© 2022 The American College of Financial Services TheAmericanCollege.edu 888-640-3748