Do Macroeconomic Experiences Affect Risk-Taking? *
UC Berkeley and NBER
Stanford University and NBER
First draft: December 2006
We investigate whether differences in individuals’ experiences of macro-economic shocks affect long-
term risk attitudes, as is often suggested for the generation that experienced the Great Depression. 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.
We also find that cohorts that have experience high inflation are less likely to hold bonds. These results
are estimated controlling for age, year effects, and a broad set of household characteristics. 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.
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).
* We thank seminar participants at Harvard, Stanford, and the Annual Meeting of German Economists Abroad for
comments, and Sith Chaisurote and Nelli Oster for excellent research assistance.
“I don’t know about you, but my parents were depression babies, and as a result, avoided the stock
market and all things risky like the plague.”