Macroeconomic experiences and risk taking of euro area households

This paper studies to what extent the experiences of households shape their willingness to take financial risks. It starts by extending the U.S. evidence of Malmendier and Nagel (2011) to euro area households, and shows that experienced stock market returns matter in a statistically significant and economically substantial fashion: better experiences make households more willing to take financial risk and increase their stock market participation, even if euro area households seem to be discounting the past more quickly than those in the United States. Subsequently, the paper moves on to show that there are additional effects stemming from the experience of stock market crashes – which are different from those of stock market booms. Crashes stay in household’s memory and lower stock market participation, whereas booms raise participation, but their effect eventually fades out. Furthermore, households in countries that witnessed a particularly severe 2008 stock market crash give substantially more weight to the most recent experience, suggesting that in these countries an even more pronounced underinvestment in the stock market should be expected in the years to come.