age is more than just a number
Yields on 10-year U.S. Treasuries hit an all-time low yesterday. Before you spin a story using recent events: remember long rates have been trending down for thirty odd years. And that's true in most advanced economies. So think bigger than jobs day or Brexit or liftoff. And while I've got you thinking in decades not data releases ... also consider that the share high-growth young firms, aggregate productivity growth, and general satisfaction have all been trending down since early 2000s. And again not unique to the United States.
No single factor has a chance at explaining all these trends ... Still I think a common thread of population aging and reduced risk taking is worth exploring. The idea that aging can change individual behavior is nothing new but sometimes the gradual and the familiar are easy to discount. Also, and a bit more provocatively, I want to argue that effects of population aging go well beyond the behavior and views of older individuals.
Let me start with a few general points on population aging ...
This chart from a recent UN report shows how widespread population aging has been across much of the world and is expected to be in the coming decades.
And looking more specifically at the United States in 2015, we see from a Pew report that median age of the population also varies quite by race and ethnicity.
So how might population aging lead to less risk taking?
As we age, we are less willing to take risks.
In numerous studies, including my job market paper, older individuals are less willing to take risks than younger ones. In fact, I was able to see how much risk tolerance changed with age (and other factors) in decade-long panel study of older adults. Aging by a decade led to a 17 percent decline in risk tolerance. For comparison, women were 14 percent less risk tolerant than men, on average, even after taking into account several other observables including age. My main takeaway from this work was that persistent differences across individuals create more variation in the willingness to take risks than the changes within person over time. However, of the factors that seem to cause risk preferences to change, aging was by far the most robust in my data and shows up in other studies, including those with younger adults.
The Great Recession likely "aged" our young adults.
Aging is more than adding up of years. It is about gaining life experiences. Malmendier and Nagel have an excellent "Depression Babies" papers on how the financial events that individuals actually live through shape their willingness to take risk. Extending their findings to today, keep in mind that Millennials have surpassed Boomers as the largest living cohort in the United States. You might think that this large, younger cohort would help balance out the effects on aggregate risk tolerance of Boomers aging. And yet, Millennials came of age in the Great Recession and thus their life experience is heavily influenced by those negative financial shocks. There is some good news on this front though, as Millennials age and the Great Recession will not loom as large in their total life experiences. Plus the researchers found that the most recent events experienced have more effect on the willingness to risks than earlier events. Still at least, anecdotally, many have suggested that the Great Depression had some lasting effects on those who grew up during during it.
Older peer networks may cause spillovers in risk taking.
We can move beyond the individual and also think about social impacts of population aging. A new working paper on consumption network effects by Di Giorgi, Frederiksen, and Pistaferri got me thinking about the effects of having older, more risk averse peers. I have only started to dig into this very cool empirical study with detailed Danish data that shows substantial co-worker peer effects on spending. In terms of mechanisms, they find some evidence of "keeping up with the Jones" but not status goods or risk sharing. Now that still leaves open the theoretical question of why the level of peer spending affects our own. The researchers hypothesize that peers may be a source of information, particularly on experience goods. In any case, such network effects suggest that the preferences of our peers could end up affecting us too. For what it's worth, working closely with a bunch of energetic, ever-working twenty-somethings at CEA for the past year definitely reduced my consumption of leisure. And being back at the Board, I can feel a some shift in the change-loving vibe around me. None of this says we sync up our behavior perfectly, but we are social and, on aggregate, having more people in our networks who are less willing to take risks probably creates some spillovers.
Working at older firms makes us act older too.
This last one is the most speculative and underscores the mess of causality. But before opining, let me stress that declines in various measures of entrepreneurial activity are a topic of great interest, regardless of the source. I am not necessarily arguing that population aging and a smaller pool of risk takers are reducing firm dynamism, though it might fit the profile of a global shock. Here I want to pose another spillover: The idea that firm aging may also be making us individually less willing to take risk. How institutions affect us is a massive topic, so I will stick to an imperfect anecdote. Questions about the macro-economy at CEA and the Board have a lot of overlap, as do the economic tools, outside research, data, etc. available to answer the questions. Still work flows a bit differently in a place that is almost entirely "reborn" with each Administration and than in one with more staff continuity. And I am not arguing relative merits. Older organizations offer benefits: sometimes that memo from twenty years ago is exactly what you need and reinventing the wheel all the time is inefficient. But older organizations, which also tend to expand in size with age, generally set a higher bar for change and create frictions that reduce risk taking.
In summary, age is more than just a number ... it can tell us something about a mindset, a set of life experiences, and even some social cues. As with any common thread, it is a messy, incomplete story of how risk taking may be changing, but it still seems to me that population aging, in its many forms, deserve more attention when we try to make sense of macro trends.
PS: I didn't quite fit in my post, but Kocherlakota's piece this week on the power of the old was the nudge that got me to write up my musing on this topic.
PPS: I linked to un-gated versions of all the papers. Some of them have been published (including mine, yeah) but those tend to be gated links. Also the reference section of each paper will give A LOT more research to read.
**Opinions here are mine and should not to be attributed to anyone with whom I work.**