Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?

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Abstract
We investigate whether differences between individuals in their experiences of macro-economic shocks affect long-term risk attitudes, as is often suggested for the generation that experienced the Great Depression early in their lifetime. Using data from the Survey of Consumer Finances from 1964-2004, we find that birth-cohorts that have experienced high stock market returns throughout their life are more likely to be stock market participants, and, if they participate, invest a higher fraction of liquid wealth in stocks, and report lower aversion to risk. These results hold controlling for age effects, year effects, and a broad set of household characteristics. Our estimates indicate that stock market returns early in life still have some impact on risk-taking several decades later. However, more recent returns have a stronger impact, and their effect is slowly fading away as time progresses. Thus, the experience of risky asset payoffs over the course of an individuals' life affects subsequent risk-taking by shaping beliefs and/or risk preferences. Our results 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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