Week 1 - Malmendier, U., and Nagel, S. (2011). Depression babies: Do macroeconomic experiences affect risk taking?. Quarterly Journal of Economics, 126, 373–416.

Question 1

What is the main idea of the paper?

Answer 1

This paper examines whether individuals’ risk attitudes differ depending on the macroeconomic history they experienced over the course of their lives. In particular, it tests whether individuals who experienced periods of low stock-market returns (eg. Depressions/crises) express a lower willingness to take financial risk, are less likely to participate in the stock market and invest less in stocks, and whether individuals who lived through periods of low bond returns are more wary of participating in the long-term bond market. The paper measures financial risk-taking with survey questions, and use direct asset allocation for stock/bond market participation.

the paper uses a weighted average of returns to include the effect that more past
experiences have less influence now

Question 2

What factirs is the weighted average of past asset returns dependedent on?

Answer 2

Age of the household head.
How many years ago the return was realized (k).
Shape of the weighting function, captured by parameter λ.

Question 3

what is the summary of the paper?

Answer 3

 Risky asset returns experienced over the course of an individual’s life have a significant
effect on the willingness to take financial risks.
Individuals who have experienced high stock market returns report higher tolerance of
financial risk, are more likely to participate in the stock market, and allocate a higher
proportion of their liquid assets to stock
 Individuals put more weight on recent returns than on more distant realizations.
 But experiences many years ago still have some impact on current risk taking.
 Application to BF: our beliefs are not static, can change over time and are influenced by
our experiences