Exogenous events shape cohort expectations

Many people, in discussing how people differ from one another fall back on the big three of race, class, gender/orientation. I have long argued that that is limiting. That there are known measurable differences related to educational attainment, region, geography, religion, culture, age, etc. One element that frequently gets passed over is generational cohort which often gets confused with age. Independent of aging, there are external events that leave a mark on each generation in ways that sometimes are hard to measure or discern but which are none-the-less influential. This paper, Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking? by Ulrike Malmendier and Stefan Nagel, provides empirical support for that position.

From the abstract:

We investigate whether differences in individuals’ experiences of macro-economic shocks affect longterm 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).