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Does Experiencing a Crash Make All the Difference? An Experiment on the Depression Babies Hypothesis

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  • Amanda Safford
  • James Sundali
  • Federico Guerrero

Abstract

Do people who lived through the depression take fewer financial risks because of the negative returns experienced? More generally, what is the importance of historical return streams on current investment decisions? This experiment tests this experience hypothesis and finds that subjects who experience a great crash hold, on average, 6% less of their assets in stocks than subjects who did not experience the crash, after controlling for gender, employment status, and financial literacy. Our results suggest that subjects who experience a significant market crash have lower and more volatile beliefs regarding future stock returns. Furthermore, we find that experiencing a crash causes a significant difference in the overall belief distributions between the two groups, with the crash cohort holding more realistic beliefs about future stock market returns.

Suggested Citation

  • Amanda Safford & James Sundali & Federico Guerrero, 2018. "Does Experiencing a Crash Make All the Difference? An Experiment on the Depression Babies Hypothesis," SAGE Open, , vol. 8(2), pages 21582440187, May.
    • Handle: RePEc:sae:sagope:v:8:y:2018:i:2:p:2158244018778734
    DOI: 10.1177/2158244018778734
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    References listed on IDEAS

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