Crisis Babies?

So, what will be the long-term effects of the crisis on people’s savings and investment patterns?  Will we just go back to business as usual once this is all over?  Not so, according to a paper by Ulrike Malmendier and Stefan Nagel, who studied individuals’ risk attitudes over the period 1964 to 2004.

The average stock market participation rate for the generation that experienced the Great Depression as teenagers or adults is less than half that of all other age cohorts.  In striking contrast, the 1931-40 age cohort that experienced the post-war boom years as young adults has a stock market participation rate almost twice the average.  Judging from that, we can expect a big crisis impact on the financial markets for a long time to come, as much from the demand as from the supply side. 

There is one piece of hope, however.  The data suggest that both recent and past experience counts.  Young households in the early 1980s, having experienced the dismal stock returns of the 1970s, had lower rates of stock market participation than older households for whom the negative experience of the 1970s was moderated by the high-return experience of the 1950s and 1960s.