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Economic experience in formative years affects adult attitudes

In a paper entitled Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking? (PDF) Ulrike Malmendier and Stefan Nagel try to determine what effect the larger economic environment during childhood has on adult economic decision making.  They lead in with the idea that people are biased and will incorporate all available historical data from their experience.  From the abstract:

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 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.

To summarize, people who grew to adulthood during the depressions of the 30s and the 70s exhibit significantly lower participation in equities and other (greater than zero risk) financial instruments than those maturing at other times.

The study is in aggregate, meaning that it doesn’t analyse specific individual behaviour so it doesn’t determine what mitigating actions people can take to alter their financial risk tolerance.

I reached the age examined in the study (36-43) during the crash of 01/02 and the recent financial ass-kicking.  Does this mean that I’ll become stable with higher risk aversion than those born before or after me?  Not sure.  Likely the best prescription to counteract the high or the low risk tolerance of your specific generation would be to become economically literate, from an early age - not necessarily so that you become an expert forecaster, but so that you can determine when the forecasts of others are likely to be complete crap and react accordingly.

The gang over at Freakonomics suggest that parents might want to avoid talking about the financial crises with their kids because of the evidence of the study.  Given the age range that the researchers worked through and the correlations they saw, talking to kids that aren’t age of majority isn’t likely to affect their future attitudes, unless of course you’re one those tiring boring parents that yammer like a broken record about only one topic well into your children’s 40s.

Thanks to the Economist for the link.

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