We investigate whether individuals' experiences of macro-economic outcomes have long-term effects on their risk attitudes, as often suggested for the generation that experienced the Great Depression. Using data from the Survey of Consumer Finances from 1964-2004, we find that individuals who have experienced low stock-market returns throughout their lives report lower willingness to take financial risk, are less likely to participate in the stock market, and, conditional on participating, invest a lower fraction of their liquid assets in stocks. Individuals who have experienced low bond returns are less likely to own bonds. All results are estimated controlling for age, year effects, and a broad set of household characteristics. Our estimates indicate that more recent return experiences have stronger effects, but experiences early in life still have significant influence, even several decades later. Our results can explain, for example, the relatively low stock-market participation of young households in the early 1980s, following the disappointing stock-market returns in the 1970s, and the relatively high participation of young investors in the late 1990s, following the boom years in the 1990s. In the aggregate, investors' lifetime stock-market return experiences predict aggregate stock-price dynamics as captured by the price-earnings ratio.
Questions on how we spend our money and our time - consumer goods and services, home and vehicle, leisure and recreational activities
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This new paper by Ulrike Malmendier and Stefan Nagel has just been released by the National Bureau of Economic Research. It is relevant to our current experience and what it might imply about our future investing habits. The abstract is:
Yes I think it is a conditioned response. My dad and his family were adults raising kids in the Depression and would never invest in the stock market. They believed in small businesses where they had control and cash. My wife's parents were kids (and 20 years younger than my dad) in the depression and experienced a growing stock market when they were young adults raising kids. Her Dad loves the market and still invests actively.
My mother had risk aversion like this too. So we used balanced funds to hide the volatility. Yes, she knew it was irrational in her head, but the smoother returns made her feel good. 50% Wellesley and 50% in Wellington makes a dandy way to save money even if its only about 1/2 of the liquid assets.