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Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?

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Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?

I. Introduction
In the paper, Ulrike Malmendier and Stefan Nagel explain how the experience of a macro-economic shock influenced the long-term risk attitudes of the depression babies’ generation. The authors analyze whether the individuals’ risk attitudes in financial decisions vary as per the macroeconomic history they experienced during the course of their life. They observe that households with higher life-time average inflation invest lesser liquid assets in bonds. In addition, individual investors’ willingness to bear financial risk is governed by their personal history.
II. Data and Methodology
A. Survey of Consumer Finances
The authors use four different measures of risk-taking. First measure is based on reaction to a survey regarding individual’s willingness to take financial risk; second measure is stock market participation; third measure is the proportion of liquid assets invested in stocks or mutual funds; and fourth measure is the proportion of liquid assets excluding stocks that are invested in bonds.
B. Methodology
The authors examine the connection between risk-taking and the past stock market returns and inflation experienced by the household head since birth. They also analyze the effects of past returns on current risk-taking.
C. Summary Statistics
The authors demonstrate how the past returns experienced by investors over their lifetime change stock market participation over time.
III. Results
A. Elicited Risk Aversion
The positive effect of past stock return experiences on the present willingness to take risks is illustrated.
B. Stock Market Participation
The authors explain how personal stock market return experience of investors influence stock market participation.
C. Proportion Invested in Risky Assets
The authors establish the effect of the experience of life-time average stock returns on risky asset shares i.e. the proportion of the liquid assets invested by households in stocks and mutual funds.
D. Graphical Summary
It provides the graphical summary of the results for the first three measures of risk taking i.e. life-time average returns, stock market participation rates, risky asset shares, and elicited risk aversion. The graphs also indicate how the risk taking among the young and old households changes over time depending on their experiences.
E. Bond Holdings and inflation
The authors connect the proportion of liquid assets other than stocks invested in bonds with life-time average inflation and confirm that earlier experiences of high inflation lessens the willingness to hold bonds.
F. Methodological variations and robustness checks
The authors test the robustness of their results.
IV. An Aggregate Perspective
The authors prove how investors’ willingness to take risks is dependent on their personally experienced history of stock market returns and inflation.
V. Conclusion
The authors conclude that life-time stock returns and inflation influence the individual’s willingness to bear risks. Therefore, individuals having experienced high stock returns are more likely to participate in stock market and allocate a higher proportion of liquid assets to risky assets. Whilst individuals, who experienced higher inflation, tend to invest a lower proportion of non-stock liquid assets in bonds. In addition, past experiences of stock returns and inflation does have an impact on the present risk-taking of older households.

Malmendier, Ulrike and Nagel, Stefan, "Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?" (August 2007). AFA 2008 New Orleans Meetings Paper Available at SSRN:



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