Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?



We investigate whether individuals’ experiences of macro-economic shocks 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 that have experienced high stock-market returns throughout their lives report lower risk aversion, are more likely to be stock-market participants, and, if they participate, invest a higher fraction of liquid wealth in stocks. At the same time, individuals that have experienced high inflation are less likely to invest their (non-stock) assets in bonds and favor inflation-proof cash-like investments. All results are estimated controlling for age, year effects, and a broad set of household characteristics. Our estimates indicate that the most recent returns and inflation rates have the strongest effect, but experiences earlier in life still have some influence, even several decades later. Thus, the experience of risky asset payoffs over the course of an individual’s life affects subsequent risk-taking. Our results can explain, for example, the relatively low rates of stock-market participation among young households in the early 1980s (following the disappointing stock-market returns in the 1970s depression) and the relatively high participation rates of young investors in the late 1990s (following the boom years in the 1990s).
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Ingolf Dittmann