Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?

Source: Malmendier, U. & Nagel, S. (2011) · Quarterly Journal of Economics 126(1), 373–416 · DOI: 10.1093/qje/qjq004

The idea

Personally-lived macroeconomic history shapes financial risk-taking. Individuals who have experienced

low stock-market returns over their own lifetimes report lower willingness to take financial risk,

are less likely to participate in the stock market, and — conditional on participating — hold a

smaller equity share. Those who experienced low bond returns are less likely to own bonds.

Recent experiences carry more weight than distant ones, but early-life experiences still matter decades

later — a departure from rational expectations that weight all available history equally.

Data: Survey of Consumer Finances, 1964–2004, used to build four risk-taking measures (willingness

to bear risk, stock participation, bond participation, equity share of liquid assets).

Each measure is related to the household's lifetime-experienced stock/bond returns, with a

flexible weighting function governed by an estimated parameter λ: λ estimated > 0 means weights

decline with how long ago the return occurred (recent experiences weigh more); estimated λ values

are similar across the four risk-taking measures.

All results control for age effects, year effects, wealth and income, distinguishing experience

effects from life-cycle and aggregate-time effects.

Effects are stronger for younger households (a given experience is a larger share of their short

history). Example: low young-household participation in the early 1980s (after weak 1970s returns) vs.

high participation in the late 1990s (after the boom).

In aggregate, investors' lifetime stock-return experiences help predict the price–earnings ratio.

A landmark in behavioral / experience-based learning. It explains persistent cohort differences in

risk-taking and informs models of belief formation, the equity-premium puzzle, and household finance.

Survey-based; separating experience from cohort/time effects relies on the imposed weighting structure

and the age/year controls.

The experience-weighting (λ) is estimated, not micro-founded; the paper does not fully separate the

preferences vs. beliefs channel.

Malmendier, U. & Nagel, S. (2011) — Depression Babies — Quarterly Journal of Economics

Malmendier, U. & Nagel, S. (2016) — Learning from Inflation Experiences — Quarterly Journal of Economics

Vissing-Jørgensen, A. (2003) — Perspectives on Behavioral Finance — NBER Macroeconomics Annual

Provenance: verified/generated from the paper's full text.