Posted by: Dirk | February 4, 2009

Depression Babys

In a very interesting paper called Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking? (pdf), Ulrike Malmendier and Stefan Nagel find:

Our estimates indicate that stock market returns and inflation early in life affect risk-taking several decades later. However, more recent returns have a stronger effect, which fades away slowly as time progresses. Thus, the experience of risky asset payoffs over the course of an individuals’ life affects subsequent risk-taking.

Mix this finding with polls on which kinds of investment people want to make in the next 2 years (for Germany, see this poll at statista.de for 2005-07) and you might get a very gloomy picture. 62% of people answered that they will not invest in anything, 18% did not reply at all, and then at 4% you find bonds, stocks and real estate. I would like to see numbers for 2008 or 2009, since they would probably show that people invest less in risky assets and more in safe ones. There surely is a psychological effect that makes people depressed, which leads to their pessimistic attitude, but this is exactly the point: after big crises, people change their investment behaviour. This would be the case for a depressed stock market in the medium run, following the fate of the Nikkei Index. I lack more information to evaluate this case, but the logic is clearly there, I think. Especially if you connect it to a Fisher type of debt deflation.

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