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Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?

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  • Ulrike Malmendier
  • Stefan Nagel

Abstract

We investigate whether individual experiences of macroeconomic shocks affect financial risk taking, as often suggested for the generation that experienced the Great Depression. Using data from the Survey of Consumer Finances from 1960 to 2007, we find that individuals who have experienced low stock market returns throughout their lives so far report lower willingness to take financial risk, are less likely to participate in the stock market, invest a lower fraction of their liquid assets in stocks if they participate, and are more pessimistic about future stock returns. Those who have experienced low bond returns are less likely to own bonds. Results are estimated controlling for age, year effects, and household characteristics. More recent return experiences have stronger effects, particularly on younger people. Copyright 2011, Oxford University Press.

Suggested Citation

  • Ulrike Malmendier & Stefan Nagel, 2011. "Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 373-416.
    • Handle: RePEc:oup:qjecon:v:126:y:2011:i:1:p:373-416
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    File URL: http://hdl.handle.net/10.1093/qje/qjq004
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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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