**Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?** Ulrike Malmendier and Stefan Nagel NBER Working Paper No. 14813 March 2009 This paper investigates whether individuals' experiences of macroeconomic outcomes influence their risk attitudes, particularly for the generation that experienced the Great Depression. Using data from the Survey of Consumer Finances (SCF) from 1964-2004, the authors find that individuals who experienced low stock-market returns throughout their lives report lower willingness to take financial risk, are less likely to participate in the stock market, and invest a smaller fraction of their liquid assets in stocks. Similarly, individuals who experienced low bond returns are less likely to own bonds. These results are estimated controlling for age, year effects, and household characteristics. The authors find that more recent return experiences have stronger effects, but early-life experiences still significantly influence risk-taking behavior, even decades later. Their findings explain, for example, the relatively low stock-market participation of young households in the early 1980s, following disappointing returns in the 1970s, and the relatively high participation in the late 1990s, following the boom years in the 1990s. Overall, investors' lifetime stock-market return experiences predict aggregate stock-price dynamics as captured by the price-earnings ratio. The paper uses repeated cross-section data on household asset allocation from the SCF and constructs four measures of risk-taking: willingness to take financial risk, stock-market participation, bond-market participation, and the proportion of liquid assets invested in stocks. The authors relate these measures to households' experienced histories of stock and bond returns. They find that households with higher experienced stock-market returns are more willing to take financial risk, participate more in the stock market, and invest more of their liquid assets in stocks. Similarly, households with higher experienced bond returns are more likely to participate in the bond market. The estimated weights for all four risk-taking measures are similar, with more recent experiences receiving higher weights. However, even returns experienced decades earlier still have some impact on older households. The authors also find that only stock returns, but not bond returns, have a positive influence on stock-based risk-taking measures, while bond market participation is positively influenced by experienced bond returns, but not by stock returns. The paper addresses several identification issues, including the potential for reverse causality and the non-separability of cohort, age, and year effects. The authors use an ordered probit model to estimate the relationship between experienced stock returns and risk aversion, and a probit model to estimate the relationship between experienced stock and bond returns and participation in the stock and bond markets. They find that experienced stock returns have a significant and positive effect on risk tolerance and stock-market participation, while experienced bond returns have a positive effect on bond-market participation. The results**Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?** Ulrike Malmendier and Stefan Nagel NBER Working Paper No. 14813 March 2009 This paper investigates whether individuals' experiences of macroeconomic outcomes influence their risk attitudes, particularly for the generation that experienced the Great Depression. Using data from the Survey of Consumer Finances (SCF) from 1964-2004, the authors find that individuals who experienced low stock-market returns throughout their lives report lower willingness to take financial risk, are less likely to participate in the stock market, and invest a smaller fraction of their liquid assets in stocks. Similarly, individuals who experienced low bond returns are less likely to own bonds. These results are estimated controlling for age, year effects, and household characteristics. The authors find that more recent return experiences have stronger effects, but early-life experiences still significantly influence risk-taking behavior, even decades later. Their findings explain, for example, the relatively low stock-market participation of young households in the early 1980s, following disappointing returns in the 1970s, and the relatively high participation in the late 1990s, following the boom years in the 1990s. Overall, investors' lifetime stock-market return experiences predict aggregate stock-price dynamics as captured by the price-earnings ratio. The paper uses repeated cross-section data on household asset allocation from the SCF and constructs four measures of risk-taking: willingness to take financial risk, stock-market participation, bond-market participation, and the proportion of liquid assets invested in stocks. The authors relate these measures to households' experienced histories of stock and bond returns. They find that households with higher experienced stock-market returns are more willing to take financial risk, participate more in the stock market, and invest more of their liquid assets in stocks. Similarly, households with higher experienced bond returns are more likely to participate in the bond market. The estimated weights for all four risk-taking measures are similar, with more recent experiences receiving higher weights. However, even returns experienced decades earlier still have some impact on older households. The authors also find that only stock returns, but not bond returns, have a positive influence on stock-based risk-taking measures, while bond market participation is positively influenced by experienced bond returns, but not by stock returns. The paper addresses several identification issues, including the potential for reverse causality and the non-separability of cohort, age, and year effects. The authors use an ordered probit model to estimate the relationship between experienced stock returns and risk aversion, and a probit model to estimate the relationship between experienced stock and bond returns and participation in the stock and bond markets. They find that experienced stock returns have a significant and positive effect on risk tolerance and stock-market participation, while experienced bond returns have a positive effect on bond-market participation. The results